Leverage on the benefits of refinancing

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In chapter five of my book, How You Can Become a Multi-Millionaire Real Estate Investor, I wrote on the five types of returns from property investment. There is a sixth and powerful return which I shall call, The Power and Magic of Refinancing! One unique feature of property investing is the ability to pull money out every few years via refinancing as the value of property increases due to inflation and the outstanding loans are reduced, thanks to rental income. In this article, I will highlight a simple example where you can take out your original down payment in the seventh year. Thereafter, you own a “zero-money-down” asset working hard that generates infinite returns for you.
Your family’s inflation rate is much higher, around 6 to 8% p.a. It is primarily dependent upon the parent’s and children’s lifestyle. Usually, children’s inflation rate is higher than their parents due to difference in lifestyles. Hence, any long term investments that do not give you returns above your family’s inflation rate are considered to be poor investments.
Assumptions:
Purchase price = RM100,000 (for a low cost apartment which most people can afford
Down payment = RM20,000 (20%)
Loan = RM80,000 (80%)
Interest = 5% p.a.
Tenure = 20 years
Note: The interest and tenure is on the conservative side. Today, it is possible to get loans at BLR – 2.2% p.a. and tenure of up to 40 years or age 70.
Yearly instalment = RM6,418 or RM535 per month
Rental = RM600 per month (which is enough to pay the monthly instalment and service charges)
Cashflow = Zero every month
Apartment location = Within 15 minutes’ walking distance to a nearby train station, where the occupancy is more than 90%
For simplicity in calculations, other costs such as legal fees, stamp duty, etc, are ignored. We also assume that interest rate, rental and price appreciation over 20 years remains unchanged.
Reduction of loan over time
Take a look at how a loan of RM80,000 reduces over time from the Loan Amortisation Table below.
                                                                                                                  Loan Amortisation Table

		A			B		A-B
Year	Interest             p.a	Loan start               Balance	Yearly           Instalments	Interest     payment	Principle       repaid	Total     principal       repaid	Loan end      Balance
1	5	80,000	6,418	4,000	2,418	2,418	77,582
2	5	77,582	6,418	3,879	2,539	4,958	75,042
3	5	75,042	6,418	3,752	2,666	7,624	72,376
4	5	72,376	6,418	3,619	2,800	10,424	69,576
5	5	69,576	6,418	3,479	2,940	13,363	66,637
6	5	66,637	6,418	3,332	3,087	16,450	63,550
7	5	63,550	6,418	3,178	3,241	19,691	60,309
8	5	60,309	6,418	3,015	3,403	23,094	56,906
9	5	56,906	6,418	2,845	3,573	26,667	53,333
10	5	53,333	6,418	2,667	3,752	30,418	49,582
11	5	49,582	6,418	2,479	3,939	34,358	45,642
12	5	45,642	6,418	2,282	4,136	38,494	41,506
13	5	41,506	6,418	2,075	4,343	42,837	37,163
14	5	37,163	6,418	1,858	4,560	47,397	32,602
15	5	32,603	6,418	1,630	4,788	52,186	27,814
16	5	27,814	6,418	1,391	5,028	57,213	22,787
17	5	22,787	6,418	1,139	5,279	62,493	17,507
18	5	17,507	6,418	875	5,543	68,036	11,964
19	5	11,964	6,418	598	5,820	73,856	6,144
20	5	6,144	6,456	307	6,149	80,005	-5

Under the column ‘Total Principal Repaid’ in blue, take a look at the numbers highlighted in yellow. At the end of year seven, the total principal repaid is around RM20,000 which is the original down payment amount. It’s possible (subject to the bank’s terms and conditions) to refinance this apartment and increase the loan quantum back to the original amount of RM80,000 and cash-out RM20,000.*
* Note: In reality, as property prices goes up over time due to inflation, it’s even possible to refinance to an amount higher than the original loan amount. Alternatively, you can pull-out the RM20,000 in a shorter time, perhaps five years instead of seven.
Leverage on the benefits of refinancing
• Properties will always be around
An investor is able pull out his original down payment or equity of RM20,000 within seven years and put it to work somewhere else, preferable on a second property. Thereafter, none of his original money is left in the first property. The first property then becomes a “zero-money-down” investment, enabling him to enjoy infinite returns.
In fact, he can keep refinancing and pull out RM20,000 every seven years for the rest of his life. Even after he passes away, the apartment will still be around and his children will be able to withdraw RM20,000 every seven years for the rest of their lives. Human beings will come and go whereas properties will always be around!
• Low risks
The investor enjoys a payback period of seven years on his capital of RM20,000. This is not considered long considering the low risks involved (as long as the property is in a good location that has high occupancy). In comparison, the payback period for new restaurants or retail outlets, which are considered to be much higher risks, is approximately three years.
For example, a good friend of mine today owns three franchises of a famous kopitiam (coffeeshop) chain. He told me that his investment in one outlet is approximately RM1 million. Each outlet is able to generate profits of around RM30,000 per month or RM360,000 per year. Within three years, he is able to recover his original investment of RM1 million, which he then uses to open another outlet. On the surface, the returns and payback period may seem very attractive, but the risks he takes are also very high.
• Keep duplicating
If you are a full-time employee, it’s possible for you to replicate my business friend’s success via property investments which entails much lower risks. You can easily recover your down payment of RM20,000 within seven years, which you can then use for a down payment on your second property. If you wish, you can then duplicate the formula seven years later (in year 14) by refinancing the first and second property and pull out RM40,000, which you can then use to purchase two more properties.
An initial down payment of RM20,000 in one property has enabled you to acquire four properties within 14 years. Another seven years or in year 21, you can refinance all four properties, pull out a total of RM80,000 and purchase another four properties. This is the power and magic of refinancing that no other investments can offer!
For more information and the latest dates on Milan Doshi’s property preview or the full 3-day workshop, call 019-572 8898 / 017-966 6178 or visit starprop.propertyintensive.com

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