ZERO DOWN Investment Strategy 1 : Power of Credit Card
After understanding the purpose why typically Asian in general and Malaysian in specific likes to invest in properties, we have researched and compiled some commonly used strategies how a property investor investing WITHOUT taking out a single sen from their pocket through the ZERO DOWN investment method.
What, Investing using credit card, are you sure this works ?? This could be the question lingering in your mind now. The answer is a affirmative Yes.
To many of us, credit card is labelled as spending future money away, and many planners or advisors has suggested people to trim the usage of credit card to control their spending. While we agree there are logic to this move, but just like a double edge sword, credit card if use for consumption purpose, like buying and shopping till your pants drop etc is definitely not financially healthy. However, many has ignored the power of leverage of the credit card, that is utilizing the available credit limit in the credit card for funding the first down payment on the property purchase !
How this works ? Let us illustrate with a real case study.
A property investor has identified a property deal buy direct from the developer. The property is under construction and this is the “sweeteners” offered by the property developer.
- The legal fees of Sales and Purchase(S&P), Loan agreement, and Memorandum of Transfer(MOT) all borne by the developer.
- The progressive interest charged during the property construction are all borne by the developer, this is termed as DIBS(Developer Interest Bearing Scheme).
- After handing over the property after completion, the 1st 1 year loan installments will be paid by the developer.
Sound too good to be true ? But there is such a deal, and usually within a certain window of opportunity, you just need to look around and observe.
Now, come to the property financing part, the loan is approved by the developer panel bank with 90% loan margin. This means the investor has to take out the first 10% money as down payment to the property itself.
This 10% comes to around 70,000. At the time of purchase, a credit card company offers only 5% interest for 30 months repayment term, that is essentially 2% interest / year. After getting consent from developer, So, the whole 70,000 first down payment is charged to the credit card with repayment of 2,450/month for next 2 1/2 years !
With the recent property price hike and capital appreciation, the property has been completed and now worth around 900,000.
Lets examine the following figures :
Total capital outlay = 73,500(70,000 principal +3,500 credit card interest)
Loan borrowed = 630,000
House value = 900,000
If the investor where to sell off the property, a sum of new capital around 150,000* has been generated using the credit limit. This new sum of capital can then serve as the seed money for the next property purchase.
* the capital sum of 150,000 is an approximate figure after deducting the loan principal payment, credit card repayment, other associated cost incurred in the property transfer etc.
Nevertheless, one word of caution on this investment strategy is that the credit rating of the investor has to be strong with good repayment record, also, the investor has to evaluate the financial strength and track record of the developer itself.
Stay tuned with us next week for the ZERO DOWN strategy 2 : Power of the Bank