A reader recently posed this question: The debt service ratio requirements in Malaysia determine the quantum of a housing loan. So, how about the individuals owning more than 10 properties? How do they do it with their DSR?
This article illustrates four ways you can own multiple or maybe even an unlimited number of properties in Malaysia without busting up your personal debt service ratio (DSR).
But first, DSR = (total monthly debt commitment / monthly income) x 100%. So, if a person earns RM8,000 a month and pays mortgage instalments of RM3,000 a month and a car loan of RM1,000 a month, his DSR works out to 50%.
1. The conventional way
Malaysians can apply for a 90% loan-to-value (LTV) mortgage for two residential properties and a 70% LTV mortgage for the third, fourth, fifth and so on.
Malaysians are entitled to an 85% LTV mortgage for commercial property. Thus, the total down payment would be as follows:
If an investor wishes to buy 10 residential properties at a rate of one per year for RM300,000 per property, they need to pay RM780,000 in down payments and will obtain RM2,220,000 in mortgages, on which they will pay monthly instalments of RM11,380.
This calculation assumes:
- The investor is young and obtains a 30-year mortgage for the 10 properties.
- Mortgage reducing term assurance is excluded from the mortgage.
- The interest rate for all mortgages is fixed at 3% per annum.
If the investor plans to maintain their DSR at a maximum of 50% and let’s assume that apart from the 10 properties, they are paying off a car loan at RM1,000 per month, then, they need a monthly income of RM24,760.
The investor could raise their monthly income by increasing active income and charging rent for the 10 properties.
This could be the most stable method of building a sustainable property portfolio for it would demand an investor to be financially strong before adding new property into the portfolio.
But the journey is not easy, as a 30% down payment is required to purchase the third, fourth and subsequent properties.
2. The proxy way
For example, Jim is a businessman who owns two residential properties and wants to buy a third. By conventional means of purchasing, he must make a 30% down payment.
But Jim has Mike, a staff member who has worked for him for five years and earns a monthly salary of RM5,000 and does not own a property. So, Jim proposes this to Mike:
- Mike buys the property under his name, acting as a proxy to Jim. Mike can obtain a 90% LTV mortgage as it is his first purchase of a property.
- Jim pays the 10% down payment for the property, services the instalments and pays for all property expenses.
- Mike assigns the property to Jim via a power of attorney (POA) document and if Jim sells the property, he is willing to pay 20% of the profit to Mike.
Jim’s DSR is not affected as Mike is the one who obtains the loan. Jim has control over the property via the POA document.
This method works only if they can work together, if not, things can get complicated. Mike could choose not to sign the POA after he receives the keys to the property.
3. The co-ownership way
This is about pooling several people’s resources to own one property. Three brothers – Ben, Bob and Barry – want to buy a property for RM1 million, requiring a down payment of at least RM100,000.
None of the three can come up with the down payment on their own so they decide to pool their savings to buy the property together.
The title deed will bear all three names, based on the amount each contributed. But this method has many flaws such as:
- What if Ben and Bob want to sell and Barry does not want to?
- What if Ben dies without a will? What will happen to the property?
- What if Ben dies with a will and bequeaths his stake to other people?
Administering the property would be complicated if the co-owners do not agree on how to manage it.
4. The corporation way
Rick is a serial real estate investor who aims to buy several properties at auction. Each property costs no more than RM500,000 and is priced at least 30% below market valuation.
Rick wants to buy these properties with cash so ropes in others to form a corporation (Sdn Bhd).
Each contributes RM100,000. Rick and his investors will have a stake in these properties through their shareholdings in the company.
As the properties are bought with cash, the Rick and the investors’ DSR will not be affected.
This is a better method to own properties than co-ownership because the properties are manageable and transactive as all are owned by the company.
If one of the investors dies, their shares in the company are frozen and will become part of the estate, not the properties within.
So, if an individual has 10 or more properties in their portfolio, ask the following:
- Are they the sole individual owner of all the properties?
- Were some of the properties purchased via proxies?
- Are they a co-owner or were some of the properties purchased under a corporation?
This is how to differentiate real investors from hype. And remember, these are not recommendations as to how to build a property portfolio.
Each method has its pros and cons and must be chosen according to one’s character, beliefs, entrepreneurial spirit, game plan, skill sets, insights and knowledge of property investment.
This article first appeared in kclau.com
Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.