How to NEVER break your DSR investing in property

(Last Updated On: 08/06/2018)

We know that leverage in the form of mortgage is absolutely necessary in property investment. The major limitation of any property investment is Debt Servicing Ratio (DSR).  It is not fiction when you hear that a person earning RM 3k per month now can build a RM 3 mil property portfolio. But that takes time and patience, NOT overnight.It is called financial planning. And that takes in another element as well, which no property investment course or guru can teach you.

You can relate, yes? Many people moan & groan that they really want to take on more debt, but are currently “constrained” or “stuck” because of their high DSR – not able to borrow anymore from banks. Obviously, there are many ways to approach this issue, and there’s no one single solution. Property investment courses teach us how to “game” the system, and how to borrow or leverage to the hilt. How to leverage via “multiple submissions”. How to find Below Market Value properties to have a Zero Down Deal. How to find Bankers with looser Credit Policies.

However, to only look at these matters is like looking at only one side of the coin.

[The below is shared from Mark Chua – follow his Facebook wall post here]

1. Let’s recap the DSR formula – Debt Servicing Ratio = Debt / Net Income. DSR comprises of BOTH Debt AND Income. Many people attend various courses to learn how to buy Properties. On where to buy. On how to borrow or leverage efficiently. [note from LCF] As a licensed financial planner, however, I shared the perplexity feeling shared by Mark Chua that hardly anyone invests the time to build or invest in their Earned Income.

2. Building earned income – if you never put in effort to build their Earned Income, whether it is from their Career or Business, then you are never going to get far. For example, your career and salary will be stagnant at RM 3K per month for years if you never have the commitment, skillset, interest or aptitude to climb the career ladder. Or, you never identify opportunities to have a quantum leap in your career. Or too afraid to take risks to; or either one or more of the combinations.

This one aspect no financial planner or property guru can help you, it all depends on yourself.

Don’t be too impatient to hurriedly build wealth. Don’t only focus on Investments, while compromising on our Earned Income, Careers & Business. This may not be wise, and a balanced approach is probably needed.

Individual who claimed he quit his/her job at 32 and become a full time property investor is an exception, NOT a norm.

Remember  – THE MORE YOU EARN, THE MORE YOU CAN INVEST. THE MORE YOU EARN, THE MORE YOU CAN LEVERAGE. In all humility, let’s be balanced. Don’t just learn how to borrow, borrow, borrow and buy, buy, and buy. Ensure your Earned Income also grows at the same exponential pace.

dsr debt servicing ratio property investment
Debt Servicing Ratio (DSR) is a balancing act

3. Set Career Goals and set Salary targets. Invest in books or courses on how to fly up the Career Ladder. Find Mentors in your workplace that are willing to invest in your success. Learn how to lead & manage teams. Learn how to navigate office politics and to build alliances. Learn how to build your interpersonal skills. The list goes on. Some how, learning how to have a better Career isn’t as “sexy” as learning how to be a good investor. That’s why high flying employees cum savvy investors are a rare breed.

4. Savvy Investors who are flying high in their Careers or Businesses tend to be more successful over the long term. Just observe savvy investors that are successful employees or business owners, and see if you arrive at that conclusion.  A savvy investor that earns RM 30K per month tends to be a lot more successful than a savvy investor that earns RM 3K per month. It’s just simple mathematics. The higher income investor is in a position to replicate and leverage his portfolio more efficiently compared to his lower income counterpart.

The Winner isn’t the one with the Biggest Debt, but with the Highest Net Worth.

5. Many investors often confuse Asset Values, Debt and Networth. There’s even a well renowned Guru out there that says “Retire with 3 mil of Property Debts”. To me, that’s a little strange. In all humility – The one that builds their Net Worth most efficiently wins. Simplistically speaking, Net Worth is defined as the Market Value of your Assets less your Liabilities (Mortgages)

6. Does it make sense to have a lot of Assets, but also coupled with tons of Mortgages & Liabilities? Does it make sense to have tons of Assets, but you overgear yourself with a DSR of say 100% and above? That is foolish risk management.

7. We should also learn how to optimize our debt and paydown our debt more efficiently. Focus on this while building your Asset Portfolio, and this will ensure a Net Worth Creation that is more efficient and sustainable. E.g. if you took a 400,000 loan over 30 years, and you made a humble RM 4,000 prepayment per year – you will save 101K in interest and reduce your mortgage tenure by 8 years.

Another example – if you just make ONE advance payment per year – you will shave off 5 years in a 30 year mortgage. Meaning, let’s say your mortgage is due on the 30th of the month. Just pay on 1st of the month, 30 days in advance. Do this only ONCE per year. In terms of cash flow, you are not any worse off – instead of paying on Jan 30th, pay on Jan 1st. Where did I get this knowledge from? A RM 40 book which is inexpensive and a lot more technical and detailed than most courses.

Moral of the Story? Don’t be blinded or misguided by “experts” who say that you can only reach the Promised Land via Investments alone. Don’t be discouraged when these “experts” make condescending remarks that you are wasting your time as an employee. With due respect, can these experts achieve the same rate of return in properties in today’s market vs. the 2007 to 2011 “golden” era? Please ask them to show us how. If I’m being honest, I know how to build wealth, but I know my rate of return will be a lot slower today vs. the 2007 to 2011 era.

In today’s anaemic market, I humbly suggest a balanced approach for us to achieve our dreams. Don’t just learn how to Borrow, Borrow, Borrow and Buy, Buy & Buy properties. Learn to also improve your Earned Income. If you are an employee, fly up the career ladder and earn a salary well above your peers. If you are business owner, expand your business and get fantastic cash flow.

The more you earn, the more you can invest. The more you earn, the more you can leverage efficiently. The one with the Biggest Debt isn’t the winner. It’s the one with the Bigger Net Worth that wins. Reshare this post to inspire someone today.

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