On Dispensing Personal Finance Advice and Growing Money

I often got asked – “What kangtao you got?” or “What lubangs you got?” – which, more often than not means – any way to make good money with minimum risk and effort? Of course, there is. But before I went further into the conversation, most are just hoping that, by leveraging on their meagre sum of money in hand, they hope that a 50 percent consistent return will fall from the sky in a few months time, without understanding or learning about what it is. Like they said, if it is true good to be true, then it probably is. I really couldn’t find a better way to explain to such group of people without making offending remarks like “Man, you are really building sand castles in the air!”. So I normally just smiled and know that it is hard to service a client like this (I’d rather not) because without understanding the risk-return relationship, one would always expect anyone MUST be able to make money for him no matter what, even without lifting a finger himself to do any homework. I have always stressed about financial education first, making money second. Because if we think education is expensive, try ignorance.

Today’s thought has to do with Real Estate Property.

They say nothing rises forever, but property prices do. If you were to buy a condo for RM 400,000, then another one for RM 700,000, you wouldn’t want to rent them out at the same price, would you? You’d want charge higher rent for the latter. But to an extent, rent rate is determined by the market. So a prudent investor would at least know what is the going rate for similar property in that area, then take this annual rent amount – divide it by the condo price, – and it should not be less than 6 percent. Anything less, one would be short-changed in his rental income return.

Knowing this fact per se can either motivate you to take action or kill you instead. Case in point – a client of mine – 50 years old couple from Alor Setar, jumped at this opportunity to buy a RM 800k condo at a property fair in Penang – committed to the purchase just after 2 hours of consideration. Their only rationale is betting on the ever-appreciating price of properties in Penang island, and as their last resort to acquire income-generating assets prior to retirement. They only got their own house for own stay in Alor Setar.

I salute their gung-ho-ness. I asked if they ever consider other investment options rather than taking such huge leverage near retirement? Their answer was because they’ve tried stocks, unit trusts, etc but have bad experience making loss in all of them. Superstition comes in – “whatever I invest, sure lose one. So we are betting on the “sure’ factor in Penang property price appreciation“. Furthermore, don’t need to pay the mortgage loan during construction period for the next 3 years.

I was dumbfounded – here’s what I think – while the long term nature of property investment itself is low risk (“nothing rises forever, but property prices do“) but the approach is absolutely NOT. In fact, how could you call yourself a property investor if you don’t know what is and how much is the rental yield?

The takeaway from the tale above is this – if we are in our early 30’s or 40’s, and we are NOT consciously making best use of the time to grow our money consistently- then by the time we are in late 40’s or 50’s, we would be compelled to take substantial investment risk which we could have avoided if we started early.

Don’t you agree – NOT everyone can buy a 400k property without much consideration, let alone a 700k one. Even if you can, how many of such properties with such prices one can own at any one time? That is not unless you got a strong cash inflows from all other rented properties as well, before one could get additional loans.

Because I was short of time during that meeting, I didn’t manage to tell them that there are other less risky ways (given their current age) to “own” property through REITs although I acknowledge real estate ownership is the surest path to wealth. I wish them all the best and hope things will turn out fine for them in 3 years time (no property bubble or sorts).

You cannot grow lands and good assets are getting scarce. But under construction properties are always of higher risk – the reason why M-REITs are not allowed to take on such projects into their asset portfolio, and S-REIT exposure to such assets are limited to 10 percent. And we are talking about commercial properties here managed by professional real estate managers. Work-in-Progress property is deemed high risk even for professional REIT Manager (who specializes in managing and enhancing mature properties) – Apa Lagi – Us, Individual Investor?

It is known that REITs give investors access to a variety of industries and sectors with geographical diversification as well. So instead of buying a shoplot, you can buy Pavilion KL. Instead buying a condo, you can buy a hospital. Although known for its modest capital upside, betting (not literally) on the correct REIT stocks could also give faster returns than traditional property ownership (not true it Penang it seems!) via capital gain. Case in point – Axis REIT, gained 196% to date since Aug 2005 listing.

Image above – taken from The Edge 2 weeks ago. Evidently, if you are looking for value investing, a few REIT counters are still undervalued, but I think NOT for long. And the very same ones also rank top in terms of dividend yield. So here is my free advice cum answer to “What lobangs?” which is likely to suit lazy people wanting to watch their money grow. Disclaimer: Long in QCT, Al-Aqar, Tower, Hektar and AmFirst.

In other words, it is all about knowing ourselves, and knowing how an investment could turn against us, and then taking action to mitigate the risks. Come on, in everything – got people make money, got people lose money. Instead of jumping from one investment type to another, I really wonder if people have done a post mortem on WHY they lose money in their previous experience.

Me – I know I don’t have time anymore nowadays to dabble in US options, although I have my fair share of experience making and losing money in them. After all, it is a zero sum game. I am more at peace not having to check my portfolio every day, and knowing I’ll get steady dividends no matter what. When the REIT stocks drops, I’ll have a “war chest” ready to average in down to lower my holding costs. That’s what true investors have been doing for past crisis, and sitting on handsome gains. Clients in their 40’s or 50’s whom I met and people like Lai Seng Choy (Freedom, Infinite Wealth).

And in case you think I am in a preaching + advising mode today, I am actually not. Financial advisor I am, but truly, it doesn’t mean I am smarter than you. On a personal level, it only means I have done and experienced some stupid shit I wrote in my site here, and I have seen and met people with both good & bad past experience. And with that, if you are seeing yourself going into the same path, you’d probably be better off avoiding it if it’s something shitty OR be able to shortcut your way to success by reading this.