Written by: Sr. KC Law, Principal & Valuer at Action Real Estate & Valuers
This is a continuation of our previous post, you can read it here!
In our previous post, we have shared about the power of property investment and how it can help you hedge against inflation. Here are two main points from our previous article:-
Rental yield contributes to your cash flow and helps you repay your loan installments.
Holding the property long enough can help you gain capital appreciation.
Congratulations! If you have made a decision to invest part of your money in an investment property!
Next, after seeing substantial growth it brings to your finances, would you stop at purchasing only one property? Today, we shall explore a useful key to expand your property investment! Read on.
Using the example from our previous post, a property was purchased at RM 250k and appreciated to RM 300k after 2 years. Since the property has appreciated by 20% and is now worth RM300k, the purchaser has gained an equity of RM 50k.
What can he do to unlock this equity?
Here are some possible options he might consider:
1. He can choose to SELL it to buy a new car with the profit (Sounds good);
2. Go back to his bank and ask to TOP UP his loan to take out some money to go for a holiday (Sounds good);
3. To REFINANCE it with another bank that offers a lower interest rate than his current bank to unlock the profit and invest in another property. (An investor’s option!)
What does it mean to refinance?
Refinance simply means to finance again, and most often with a lower interest rate than what you are currently paying.
Let us discuss why he should consider option 3, i.e. to refinance an existing loan that he had taken just a few years ago.
Most people would probably think, isn’t this too troublesome and costly?
If another bank is willing to offer you a lower interest rate and provide free moving cost to you, that would be most favorable. However, provision of free moving cost has been closed by many banks. Despite that, it is still very much beneficial for an investor to refinance his property with a little cost as it will benefit him in the long run.
Therefore, lower interest rate is one reason behind refinancing a property with another bank.
Another reason could be because he has found another GREAT BUY property that fits into his criteria of having a reasonable yield and capital appreciation potential.
For example, he has found a 2nd property selling at RM 300k which he intends to purchase; he would still be eligible for a 90% loan from the bank since this is his second loan. He refinances his 1st property by cashing out 80% value from his 1st property, which is 0.8 x RM300k (current market value) = RM240k. Assuming that his outstanding loan from his first bank is RM 180k, he can use the RM 240k he obtained from refinancing his 1st property to redeem his 1st loan. After redeeming the RM180k of his 1st loan, he has now unlocked RM 60k in cash from his 1st property. This RM60k cash can then be used as his capital to purchase the 2nd property, by paying for the 10% deposit (RM30k) and other administrative cost of purchasing the 2nd property!
Doing so, he now has 2 properties! The 1st one with a loan of RM240k and the 2nd one at RM270k. Also, do not forget that he will still be able to get 5% rental yield from both investment properties with capital appreciation potential!
In conclusion, by simply refinancing his 1st property, he had successfully cashed out RM60k cash from his earlier investment to reinvest in a 2nd property! You can do the same!
Don’t put all your money in the bank, as the saying goes “Don’t put all your eggs in the same basket”.
Action Real Estate copyrights reserved. Do not reproduce or copy the content of this post without first obtaining our consent.
About the Author
Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyor Malaysia and Member of Malaysia Institute of Estate Agents.