December 2020

Buy house

5 factors to consider before purchasing your first property

Due to the inflation, the price of the houses is increasing every year. As of 2019, the median house prices were 4.4 times the median annual household income in 2014 as per the Khazanah Research Institute (KRI). Hence, house seems to be unaffordable to many first home buyers. There are now many affordable housing schemes launched by government with developers to assist first home buyer to own a house. Each house costs around RM 200,000 to RM 300,000.

Property purchase is a huge commitment and hence requires proper considerations and financial planning before one deciding to buy it despite it is under affordable housing scheme. The following are some factors to be considered:-

  1. Is the loan installment affordable to you? Compare the price of renting a place for own stay and the loan installment for the new home. Ideally, the loan commitment shall not be more than 30% of your income. Evaluate the impact of the increase of financial commitment to your financial situation before buying the house. You can consider delaying the decision until your financial situation is more stable or find ways to increase the income before committing the loan.
  2. Miscellaneous cost: Apart from the house cost, there are other costs associated with the purchase of the house, i.e. legal fees and stamp duty for Memorandum of Transfer, loan agreement, sale and purchase agreement, etc. Be prepared for extra cash for these.
  3. The location of the property: Choose a location that is convenient to you. If you have children, consider the schools surrounding the location. The surrounding amenities are to be considered before selecting the location.
  4. Size of the property: Size of the house does matter! Since the commitment is huge, switching cost might be high too. Choose a size of the house considering your future family planning. If you plan to have 2 children, choose a house that is spacious enough.
  5. Loan: There are various type of housing loans available, e.g. flexi loan, semi-flexi loan, fixed rate loan, etc. Survey different types of loans available before selecting it. Flexi loan normally comes with higher charges compared to semi-flexi loan. Plan ahead your finances to check which one is suitable for you. If you always have extra cash to make more loan re-payment, flexi loan can save you more interest.
  6. Developer: The creditability of developer is important when purchasing the property. Check the previous housing projects by the developer before selecting your right property to avoid ending up with poor quality housing.
Loan

Housing loan myth: Housing loan is a good debt

Most people will have an impression that property is an asset which brings money in. Thanks to the standard accounting principles which classify all properties under non-current assets which makes most people think that properties are assets.

For example, if Brian wants to buy a property for own stay, how much money does he need? Property is an expensive item. He will most likely borrow money from the bank. Is the house loan considered as good debt or bad debt?

Many will say it is a good debt because he is using the loan to buy property which most will think that it is an investment. Property will appreciate in long term so wealth will increase over time. Since the accounting principles also recognize it as asset, many people think that it is actually bringing in money.

The sad fact is own stay house is NOT an asset but a LIABILITY. Hence, the housing loan is a bad debt. Recall again the Robert Kiyosaki’s definition of assets and liabilities. Does this property put money into Brian’s pocket? No! It takes money from Brian’s pocket!

After purchasing the property, Brian is paying for the property maintenance fees, utility bills, housing loan interest. There is no income at all. One might argue that the value of the house will increase over time which means wealth will increase too. However, will Brian sell the house for profit? If he does, is he likely to buy another more expensive property for own stay? If yes, the property  is taking money out from his pocket. He would incur legal fees to discharge the property. He would then use the money received from selling the property as deposit to buy a more expensive house.

What if the property is used for renting to others? It will be different. When renting to others, Brian will receive rental income every month. If the rental received is enough to cover the loan interest, property maintenance charges and other related costs, the property is an asset. The property is putting money into Brian’s pocket – $$$$$. The best part is – is the house fully owned by Brian? Not really. Brian is taking a loan to finance the purchase of the property. During the repayment period of the housing loan, Brian gets two benefits: –

Regular income from the rental – passive income

Capital appreciation from the property – capital gain of the investment

If after 5 years, Brian chooses to sell off the property, he will pocket the difference of the selling price and the original purchase price, minus the legal costs and other related costs. It is an illusion that property is always an asset. But the truth is – it really depends! If the property is used to generate income, it will be defined as asset. If the property is taking money from your pocket, it is then a liability.

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Buy car

Can save money buying new vehicle now?

The reduction in car sale tax will end on 31 December 2020. This is the government’s initiative to help the automotive industry to boost sale during this pandemic period. Despite the fact that buying a new car is going to increase your liability but having a car in Malaysia is almost a necessary considering the public transport system in Malaysia is not complete. There are still a lot of places, even in the city, not accessible via public transport. Hence, if you are thinking to buy a new vehicle, now is the time to consider this because of the saving.

How much money can the purchaser save exactly? The purchaser will save the full sale tax (10% sale tax) for the locally assembled car (also known as CKD Completely Knocked-Down car) while the purchaser will save 50% of the sale tax (5%) for imported car.

Nett Vehicle Selling Price = Government approved selling price + 10% sales tax + margins  

Final Vehicle Selling Price = Nett Selling Price + Handling / Inspection fees + Accessories + Road Tax + Insurance
*Vehicle Selling Price formula (Source: Paultan.org)

The exact discount will be lesser than the 10% or the 5% as the discount of 10% is not on the final vehicle price. The 10% sale tax is calculated based on the government approved selling price as above. So, don’t expect the price is 10% cheaper, the actual saving could be only 3% to 6%. For example, the famous Toyota Camry (2.5V), before the tax rebate, it was selling at RM196,888, till end of December, the selling price is RM 188,763. The saving is about RM8,000+ (4%+). Check out some other car prices here.

Evaluate your ability to pay the car installment before electing to buy a new car. If it is a must to buy a car, buying it now can give you more discount now.

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Budgeting: a critical way to save more money

A lot of people have problems on saving money hence this is often used as the excuse of not to start investing. They often ask on tips or tools to save more money. In fact, the real reasons on failing to save money are only two:-

  • They are not earning enough money for their basic lifestyle
  • They fail to control their expenses / spend beyond their means.

Mostly, people fail to save are due to the second reason. In order to resolve this, budgeting is the way to enable expenses control. Budgeting allows people to plan and track. This enable people to know where their monies go and hence able to save more money.

One should start budget based on the income. In general, one should not spend more than 50% of their income on necessities. The budget will serve as the benchmark whether one overspend beyond their means. 20% saving is recommended for long term goal and the remaining 30% can be spend on wants including contributing to charity organizations.

When there is a budget in place, one would be more cautious when it comes to spending. For example, when one needs to buy a car, it will calculate whether the car installment will exceed the budget. If it is, he is likely to postpone the purchase until he has more income.

As you can see many Malaysians are falling into the debt trap which they often think that they can serve the loan installment when they purchase expensive cars and houses. “Thinking” is not effective when it comes to finance management. If you want to have control, you must be able to see and evaluate the numbers.

Let’s start budgeting to save more money.

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Investment

How to invest in disruptive business such as Tesla?

The trend now has changed since the COVID-19 pandemic. People are moving into digital world more than ever before. Energy saving, anti-aging, robotic, artificial intelligence become the trend of the future. Many businesses are now venturing into these are to tap on to the new trend.

If you notice, Tesla share was about US 50 in 2015, now it is worth near to USD 700 per share. Growth of more than 1400% in merely 5 years. The extreme growth is due to the innovative and disruptive business model.

Big technology companies like Facebook, Amazon, Google, Netflix are no longer at the forefront of the technological improvements. Even though these companies might be delivering good return for investors, the return most likely will be slower than the businesses using innovative and disruptive model.

Looking to invest easily into the companies with the futuristic thematic investment? Affin Hwang has just launched a new fund for this opportunity. The focus of the fund is on high conviction ideas in the areas of robotics, artificial intelligence (AI), DNA sequencing, energy storage and block chain. This will be a good fund for diversification too. The fund is offered in 4 currency classes, namely USD class, MYR-Hedge class, SGD-Hedged class and AUD-Hedged Class. Contact me for more details +6016 2813695.

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Leverage

Leveraging on successful businesses?

Many businesses are successful during this pandemic period especially those companies related to technology, e-commerce, social media platforms, artificial intelligent, health care and vaccine related companies.

Are we able to leverage on them? Yes, we can easily leverage on them by buying their shares. When holding the shares of these companies, we are part of their shareholders. We get profits through income distribution when their businesses are growing. We also enjoy the capital gain of their share prices when the stock prices are hiking up.

Many might ask, some of the share prices are too expensive. I cannot afford to buy. For example, Tesla company share price is now USD 600 / share, which is RM2400 per share. Amazon share price is now USD 3100, which is RM 12,000 / share. The entry price will pose some difficulty for people who are just starting out to invest. However, one can choose to invest in unit trust with all the company shares. For example, investing in the mutual fund with Technology theme. The required starting capital is only RM 1,000. While investing in the Technology Fund, one gets to leverage on these successful businesses like Amazon, Facebook, Apple, Visa, etc.

In order to realize the millionaire plan, everyone needs to invest (leverage on successful businesses) or venture into businesses. Which one is easier?

Investment requires lesser effort than venturing into a business. You can still do both and work on the business that you are passionate on. Don’t work hard for money but let your money work hard for you.

If you are starting out on investment and require advise and help. Feel free to connect with me.

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Millionaire

Millionaire game plan

Many hope to become millionaire but many think that it is hard if not impossible. Is it really that hard? I always like to use the financial calculator to indicate how simple it is to create the millionaire game plan. It is not hard, in fact most of the time, we over complicate things.

For an example, Keith wants to be a millionaire in 10 years. He has RM 100,000 capital. How he can achieve it?

Finishing line is RM 1 million; Starting point is RM 100,000; Time frame is 120 months

                 Scenario 1                                        Scenario 2                                          Scenario 3

These are the pathways to millionaire:-

Scenario 1: He needs to invest his RM100,000 for 120 months at 23%+ per annum profit / interest.

Scenario 2: He needs to invest his RM100,000 and adding RM 3,000 / month for 120 months at 11%+ per annum profit / interest.

Scenario 3: He needs to invest his RM100,000 and adding RM 4,000 / month for 120 months at 8%+ per annum profit / interest.

You shall see the game plan involves the initial capital, on-going capital and the interest rate. Higher interest rate can only be achieved with more active involvement, e.g. business, trading or leveraged investments. Which action to take shall depends on how much capital, time and skill you have. If one is good in business, his goal is to compound his capital 24% every year to turn his RM 100,000 to RM 1 million within 10 years.

There is no right or wrong in how to do planning. Once the starting point, finishing point and the time frame are known, we can identify the strategies. The tactics used depends on our risk tolerance and our preference.

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Spender

Are you a spender or an investor?

We need to spend. Our wealth creation destiny depends on how we spend our money. Money is a form of energy, it must flow. If it is kept, we are blocking the money energy from flowing. It will hurt us than do us any good. If we need to make sure our money flows out, we have 2 ways, either we spend it or we use it to invest.

Spenders are normally positive about the future. Hence, they hardly have any future plan because they believe things will turn out good in the future for them. They adopt instant gratification which they treat enjoyment more important than the future. They will spend more for luxurious items. They like big cars and houses. They are not very careful on spending because enjoyment comes first. This group of people hence will struggle more to meet the month ends. If they are not careful, they will easily fall into the credit card debts.

Investors are spenders too because they will spend their money on investments. They believe by spending on investments, the investments will in turn generate more incomes for them. Hence, they can slowly upgrade their lifestyle. They may not need to be frugal because the incomes for investors are normally higher. They are 2 groups of investors as well. One group of investors will invest using their hard earn money. The other group of investors understand the power of Other People Money (OPM), which allows them to invest using other people money.

  • Ahmad, a spender, ends up every month with zero saving every month. He bought an expensive watch and ended up with RM 4,500 credit card debt.
  • Adil, an investor, is able to save 30% of his salary every month, i.e. RM 3,000 per month. After 12 months, he used partial of his saving of RM 30,000 to purchase a low medium cost apartment at RM 300,000. He paid 10% down payment and borrowed the remaining 90% from the bank. Next, he rented out his apartment at RM 1800 per month. He sold his apartment at RM 400,000 after 3 years

Through this example, you see also two people, i.e. Ahmad and Adil are in debts. Why Ahmad has no money and is struggling while Adil is borrowing but is thriving with more money – rental and capital gain? Would you want to be spender or investor?

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