Updated: Mar 8
Let's face it, the vast majority of us don't have enough money for the deposit and closing fees in a property transaction. Yes, even those earning high incomes.
That's why new projects are so attractive. Developers often offer discounts that offset the 10% deposit you're required to pay. In fact, some developers even have cash-back rebates. So you buy a house, and can get back 20% of its value in cash.
If the house is sold at RM1,000,000, that's about RM200,000 in cash-back to you. You just have to buy 5 of such houses and you're an instant millionaire in cash. Hundreds of people have done this using a method called "loan-compression." Amazing right?
There's just one catch; the prices on these properties are highly inflated and do not reflect real market values. Therefore, there's usually minimal to no appreciation in value in the short and medium-term.
If you're buying-to-let, such properties also have very poor rental returns which makes it risky for buyers with poor cash flow.
Sub-sale properties (properties sold in the secondary market) on the other hand usually have prices that are more reflective of real market values. They're easier to evaluate because there's some history in terms of appreciation rate, rental rates, occupancy, demand, maintenance and quality.
What you see is what you get with sub-sale properties.
So here's the first big insight if you're buying a house with little capital:
You want to get a house that does not come with cash-back rebates, huge discounts and that is ideally in the sub-sale market, where you can make a fairly thorough assessment with real data (not projections).
But private owners are not going to give you cash back rebates and no-money down deals in general.
If you have very little capital, buying a house that gives you the best investment return may therefore seem like a pipe dream. Something you would love to do but simply cannot afford to.
What then do you do?
Conventional Options to Buy a House With Little Money
There are a few of options available to you.
#1 Mark-Up Sale
You can look for "very motivated" owners who're selling their houses at below-market-value (BMV) and happy to do something called a "mark-up" in the Sales & Purchase Agreement (SPA).
Let me illustrate.
John is selling his house for RM800,000. However, the house has a market value of RM900,000. You agree to buy his house on condition that the price in the SPA is RM889,000. This means, on record you're buying the house for RM889,000 but the real price you're paying is RM800,000.
The bank, thinking that you're buying the house for RM889,000, gives you a 90% mortgage amounting to RM800,000. You therefore don't have to come up with the 10% deposit.
The mark-up sale is quite common. Sometimes, you'll also be able to mark-up high enough to get cash-back that then covers your closing fees (legal fees, stamp duties, and other fees). On the outset, this may seem attractive because you're buying with no money down. However, the legality of it is suspect and you don't really benefit from the BMV.
#2 Lease Option or Rent-to-Own
You can also go for a lease-option which means you get a lease on the house with the option to buy the property in the future.
A variation of this is the rent-to-own scheme where you rent the property first with a portion of the rent going towards a deposit. After the deposit is fully paid, you have the option to buy the house.
#3 Financing From the Seller
You can also negotiate for the seller to finance the deposit. This method is risky because many banks would ask the owner to declare that the difference between the loan amount and the purchase price is fully settled before disbursing the loan. Owners will likely not give a false declaration and rightly so. I learned this the hard way in a deal that went completely sideways.
#4 Refinancing Your Current Property
If you already own a property, you could refinance your current property for the deposit and closing fees on the new house. This is probably the safest method relative to the others above. There's only one catch. Mortgage repayments on your current property will increase and you will also have a new mortgage to pay. Not so good for your cash-flow.
The hard reality, my friend, is this: if you don't have enough money to buy a house, you should not be buying a house.
You will not be able to maximise your ROI, you may have to take higher risks, and some options that you're recommended with may not be legal. These are things you don't want to get entangled in if you have little money. You can't afford it.
So how then do you buy a house in the sub-sale market with little money? My answer may surprise you.
If You Have Little or No Money to Buy a House, Use It to Make a Lot of Money First
Think about it. Why do you buy a house in the first place? It's not to put a roof over your head. Renting a house has the same effect.
You're probably buying a house for the security it offers in your retirement age. When you retire, you'll either have a house that's fully paid for or you'll have built enough equity to allow you to live comfortably.
But if you're buying a house for the security it offers, why would you take on higher risks? When you buy a house at inflated prices or with higher mortgage repayments, you're compromising on the security you're looking for.
If you're buying for investment, then you want to ensure that you have the best ROI possible. If you buy a house that is giving you poor ROI, you're better off looking for other investment instruments that give you superior returns.
To buy a house with maximum ROI, you want to find the best possible deal and have the cash to follow through without "creative" financing that results in you paying higher prices and more interest. For example, if you find a house that is 20% BMV, you want to buy it at the BMV price to enjoy lower monthly instalments and instant equity of 20%.
Now here's the million-dollar question - how do you create a lot of money with little money?
Invest Your Money On a Monthly Basis and Let the Compounding Effect Take Care of The Rest
Compounding interest is like a snow ball rolling down a mountain. It starts off small but slowly grows into a giant ball that can have BIG effect.
Not many people look at the compounding effect on investment and take advantage of it. That's because, like the snow ball, it takes time to build-up... and all of us hate waiting for anything.
In the process of trying to get fast results, we usually lose more time.
"I'll start saving when I have more money because putting aside RM5 everyday now is just too little."
5 years later, you're still not closer to being able to save substantially but had you started with RM5 per day 5 years ago, you'd have a minimum of RM9,000 in savings. In fact, you'd probably have a lot more because you'd have built a strong habit of saving and progressed to higher saving amounts every year.
If you invested this money into something that paid you compound interest, the savings would be even more substantial.
Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn't, pays it - Albert Einstein
Time is your friend, impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren sound of the market - Warren Buffet
There's a reason why Einstein and Buffet think so highly of compound interest. They know that you can make a lot of money with a little money if you wield its power. Let me illustrate.
Let's say you have RM10,000 and you put this money into an investment instrument that yields a 10% interest per annum. Every month, you add RM2,500 from your income into this investment. After 15 years, you'd have RM1,045,000 saved up.
Now let's see how this stacks up against investing in a property.
Let's assume that you can get a 30-year mortgage with 4% interest per annum. Your monthly instalment is also RM2,500, and you get a 90% mortgage which means the price of the property you have purchased is RM582,000.
Your initial capital outlay will be higher. You need RM87,000 in deposit and closing fees.
If this house appreciates by 5% every year and you sell it after 15 years, you would have an estimated:
RM678,000 if you were collecting RM2,500 rental income on it every month, or
RM266,000 if you stayed in the house and never collected rental income
Now, looking at this comparison it appears that you'd be better off investing your money in a compound-interest bearing investment than buying a house.
This would be true if you buy the house to stay in it.
However, if you buy-to-rent the annualised return is actually 14.67% which is much better than the 10% from the interest bearing investment.
Allow me to explain this. With the rental money you collect, you don't have to pay RM2,500 every month towards your monthly instalment. You'll only have to cover costs like taxes, annual repairs, and insurance. This may come up to just over RM1,000 every month.
With the interest bearing investment on the other hand, you're putting aside a fixed RM2,500 every month which is higher than the RM1,000 per month on the house. Your capital is therefore higher and this reduces your yield.
So property investment can give you great returns but as you can see above, you can easily create the capital for it by leveraging compound interest in an investment instrument. If you start on it today, you could even buy a house in 15 years without a mortgage and still have the security of living in your own house near retirement.
This now leads us to the next important question. How can you kick-start a plan that generates a lot of money so you can buy a house with the best deal?
Here's How You Can Generate RM224,000 to Buy a House in 8 Years
Determine what is the price of the house you can afford now. This would largely depend on how much you can pay in monthly mortgage instalments. Let's assume together with your spouse, you can afford to pay RM3,500 in monthly instalments.
Let's also assume, you have about RM10,000 in savings right now and you're renting a house for RM2,000 per month.
If you can afford to pay RM3,500 in monthly instalments, then you can or you should be able to set aside RM1,500 every month after paying your rent. It may be very difficult because you'd have to spend more prudently, but think of this RM1,500 as a monthly payment to the bank. You wouldn't miss a mortgage payment no matter how difficult things were right?
You can now start investing. But what investment instrument would give you 10% interest per annum? A number of Exchange Traded Funds (ETFs) can do this. ETFs are a pool of securities that track an underlying index. The S&P 500 is an example.
Returns on the S&P 500 have averaged 10% to 11% since its inception in 1926.
Here's what the world's most respected stock investor has to say about the S&P 500:
My money...is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers."
Dr. Gleb Tsipursky, CEO of Disaster Avoidance Experts, is a neuroscientist on a "mission to protect leaders from dangerous judgment errors known as cognitive biases by using neuroscience to develop the wisest and most profitable decision-making strategies."
One of the best ways to invest according to him, is to buy ETFs with a wide pool of stocks. In a very interesting episode on The Psychology Podcast titled A Science-Based Guide to Truth Seeking, Dr. Tsipursky explains why ETFs are so good and he makes a very compelling argument.
Convinced? Let's get back to your plan to generate a lot of money.
You have RM10,000 in capital and you can invest RM1,500 every month. You could do this on the S&P 500 but being in Malaysia, your access to this index may be challenging.
There is a local option.
A company called StashAway allows you to do this with relative ease. You can download StashAway's app and get started right away with as little as RM5,000. (Full disclosure: I'm in no way related to StashAway and I don't get paid in any form by StashAway if you use their app or services).
StashAway has different investment return plans with different risk levels. The performance of their "Growth Portfolio" for example is 9.4% in returns. Using this portfolio as an example, let's run the numbers.
Starting with RM10,000 and then adding on RM1,500 every month for an annual return of 9.4% less StashAway's 0.8% fee, you would have an estimated RM224,000 in 8 years saved up. You can liquidate your position easily at any time.
This is substantial enough to cover your deposit, closing fees, and renovation. In fact, if you get into the habit of investing every month, there's a high probability that you'd increase the monthly contribution towards your investment fund and have much more that RM224,000 in 8 years.
Whether you choose to use StashAway or another fund manager like Vanguard to buy ETFs, your primary concern should be the fees they charge. The lower the fees, the higher your return and the better the compounding effect.
It's as simple as that. Putting aside a relatively small amount of money every month for 8 years can give you a substantial reserve of cash to buy a house. You will not have to buy properties with inflated prices to get 100% financing or resort to barely legal tactics.
You can hunt for houses that are BMV, on auction, or just damn good deals on the sub-sale market without flinching. You'll also have reserves for a decent renovation.
But 8 Years Is a Long Time...
Think about this for a moment. If you don't have enough money for the deposits, closing fees, and renovations, what's the alternative? Buying a house using markup?
Let's say you do that. You find a house that has a market value of RM850,000 but is being sold at RM600,000. The owner agrees to a markup. So on the SPA, the purchase price is RM850,000.
The bank loans you 90% of this amount which is RM765,000. You can pay the owner RM600,000 and you have a surplus of RM165,000.
Your closing fees would come up to about RM43,000 (legal fees, duties, and valuation fees). Renovations cost you another RM50,000. You'll also have to pay any fee and tax on top of the RM600,000 on behalf of the owner. We'll estimate that at RM10,000.
So you have a net surplus of RM62,000. Not bad right?
Here's the flip side. Instead of paying RM2,578 in monthly instalments (4% interest for 30 years), you'll be paying RM3,652 per month. That's a difference of RM1,074 every month.
If you kept this house for the next 10 years, you'd pay RM276,000 in interest instead of RM195,000. That's RM81,000 in additional interest. This wipes out whatever surplus you thought you made, assuming you spent that surplus and did not invest it for good returns (like what most people do).
You see, the surplus cash is a loan with interest. It's not really surplus cash.
On the other hand, building your cash position by investing it in an ETF is TRUE surplus cash. You grew this money from seed capital that you saved every month for 8 years. It is real profit and puts you in a financially better position.
This logic deludes most people because we look at the long-term as disconnected from our present. Things have to happen fast. You have to own that house tomorrow. However, your future has got everything to do with your present. What you do today, will determine your future.
Getting into the habit of saving and investing that saving is one of the best habits you can cultivate in yourself. This is the only guarantee to a financially secure future for you. If you can do it for 8 years, you'll be able to do it for the rest of your life and you'll get better and better at it.
Now think of all the reasons why you want to buy a house. Does it fall into the following category:
If you can save and invest a small portion of your income every month for 8 years, you still get all of the above... and the most financially rewarding house after that. The best part? You can start doing this today. Immediately after reading this post.
So why wait? Go start today and own that house in 8 years or less with solid financial footing.