Do You Know How Much You Are Worth To The Banks?

Many people don’t know how to balance their portfolios and end up investing lesser than they should.

Many people don’t even know the importance of using simple formulas like Debt to Service Ratios to calculate and design their portfolio and to maximize their abilities to take up more loans.

Let me illustrate an example of 2 different investors.

Daniel and Gunalan. Both wishes to purchase a newly completed SOHO unit at an early bird price of RM400,000. Let’s calculate to see who can take this property.

Investor #1:

Daniel, a successful engineer and has invested into several projects. His portfolio is as follows:

Nett drawn salary = RM8,790

Current Debt

Monthly Car Loan = RM1,500

Outstanding Credit Card = RM4,000 (Bank takes 5%/month = RM200)

Property Portfolio

Daniel has invested into 2 developer projects, obtaining 90% loans, with 30 year financing at 6% interest p.a. His monthly installments are as follows:

Property A (@RM350K) = RM1,889

Property B (@RM600K) = RM3,238

Daniel’s DSR = Debt/ Income = (RM1,500 + 200 + 1,889 + 3,238)/ 8,790 = 0.78

Daniel’s DSR is exceeding 0.7, which is the maximum value set by most banks to allow him to take a loan. Daniel cannot take any more loans until he pays off the debts or increase his income.

Investor #2:

Gunalan is a factory supervisor. He too, is an investor. His portfolio is as follows:

Income

Nett drawn salary = RM5,710

Current Debt

Monthly Car Loan = RM690

Outstanding Credit Card = RM2,000 (@5%/month = RM100)

Property Portfolio

Gunalan has bought 3 ready properties and have rented them out. The following is his portfolio:

Property M (@RM300K) = RM1,618 Rental: RM1,800/mth

Property N (@RM400K) = RM2,159 Rental: RM2,400/mth

Property O (@RM600K) = RM3,231 Rental: RM4,000/mth

Gunalan’s total income = RM5,700 + RM8,200 (total rental) = RM13,900

Gunalan’s total debt = RM690 + RM100 + RM7,008 (total installments) = RM7,798

Gunalan’s DSR = Debt/ Income = 7,798/13,910 = 0.56

Gunalan’s DSR is below the ratio of 0.7. Therefore, he is still qualified to take another loan. After consulting the bankers, Gunalan can still afford a loan size of RM330,000 based on a 30 year loan and 6% interest. If Gunalan can afford to place a RM70,000 deposit (17.5%), he can proceed to purchase the SOHO at RM400,000.

Observe that Gunalan’s total property portfolio at the moment is RM1.3 Million, and he is only drawing a nett salary of RM5,710, as compared to Daniel, who is working as an engineer, drawing a nett salary of RM8,790, but has a property portfolio of only RM950K.

Furthermore, Gunalan can afford to own another property worth RM400,000 (with a loan of RM330,000) under his name, while Daniel cannot.

Well, property investment is a good balance of maximizing returns, as well as prudent management. A good property investor has a balance portfolio of properties that give them good rental returns as well as several properties to buy and sell. This allows an investor to leverage off the income derived from the rental to buy more properties.

The mistakes many investors do is to invest highly into properties that don’t generate enough rental or properties from developers. Though these properties can promise great returns in the future, it significantly ties up our credit to the bank and thus, prevents us from buying any more properties until the debt is paid, or the property(s) sold, or additional income is generated.

In summary, balance is key to optimizing one’s ability to leverage and obtain more properties.

Finally, the above example is for illustration purposes only. DSR and other policies will differ from bank to bank and also subject to government and Bank Negara rulings from time to time. To get better clarity of how this works and how to optimize your property investment portfolio, consult your friendly bankers and get their advise.

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