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Debt is good

By: BT

Debt is good, how can that be, but debt is really good especially if it is going to be paid back by others.

Debt is good when it is being used to invest in asset that can appreciate and at the same time generating rental income to the investor.

Lets investigate in an example, assuming that an investor purchase a 1400 square feet condo in Mont Kiara from a developer during an initial launch at RM400-00 per square feet and assuming that he take 90% loan from a bank.

Cost of condo = 1400 x RM400-00 = RM560,000-00
Down payment = RM56,000-00 (10%)
Monthly repayment for loan at interest rate of 5.99% for repayment period of 30 years = RM3,018-50

Interest rate of 5.99% is derived from a post of our property forum
Monthly installment of RM3,018-50 can be calculated using our loan calculator

Monthly rental = 1400 x RM3-00 = RM4,200-00
Monthly maintenance charges = RM0-27 x 1400 = RM378-00
Net monthly rental = RM4,200-00 - RM378-00 = RM3,822-00

Return per month = RM3,822-00 - RM3,018-50 = RM803-50
Return per year = RM803-50 x 12 = RM9,462-00

Amount of equity invested = RM56,000-00
Amount of return per year = RM9,462-00
That works out to be = 9,642-00 x 100 / 56,000-00 = 17.2%

Of course there are still some minor charges that have been taken into account such as assessment, quit rent etc but the gross return based on small equity of RM56,000-00 together with leveraging effect of using a bank loan to finance the purchase when planned carefully can bring meaningful return.

On top of that, the purchaser is bound to reap the capital gain over time when the property appreciate, healthy rental income enable the owner to hold the property longer to enjoy capital appreciation

Article Source: http://www.realestate2u.net/articledirectory

Mr BT Khoo is the webmaster of malaysiaproperty.blogspot.com & malaysia.realestate2u.info

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