Skip to main content

Loan is disadvantaged to Cash but Limited !

In an earlier article, a myth was broken where it says "getting loan will Decrease your liquidating options" so if you have the cash to buy the whole thing, you should go ahead and buy it and NOT getting a loan. Because once you get a loan, you will end up disposing your item Slower and get back Less worth - which is the opposite of liquidation.

That message has disturbed a lot of old friends who have been using loan successfully in their property investment. They have been borrowing loan in their investment for more than 10-20 years and almost always successful getting back a bigger return as a result of the loans. If loan is not a good thing or not liquidating, what has happened in the past 10-20 years, they just got lucky ?

Loan or any form of effective borrowing,
is a leverage tool.

Lets take a look at the same example used in last article; You have the option to buy an property for $100,000 and you could also get a loan where the interest is 5% for the next 10 years. Below spreadsheets show a few calculations;
The left most column in bold under "sell direct" mean if you bought with cash earlier and sell now, you would have get back this much money after the appreciation or depreciation.

The right most column in bold under "sell with loan" mean if you got the loan in the beginning, then this is what you get back in net after deducting the remaining capital.

The most important column in this article is the 2nd column from the left under "no loan - loan". It shows the difference of buying with cash vs buying with loan. If it is a positive number, it means buying with cash has an advantage earning or saving against buying with loan.
Below show 2 cases where the property could have appreciate or depreciate 10% a year ...

Case 1 : Item "appreciate" 10% a year


Case 2 : Item "depreciate" 10% a year


If you focus on the numbers in 2nd columns, they stay the same. It doesn't matter if your item increase or decrease in value, the differences between buy with cash and buy with loan are the same.

If your item appreciate, buying with loan will earn $5,000 less.
If your item depreciate, buying with loan will less $5,000 more.

It may still seems like a disadvantage to some readers up to here. But it actually is limiting the strategical cost of a transaction. No matter how the market goes, the person who got a loan will only lose $5,000 comparing to those who bought with cash earlier. In order words, the strategical cost of getting a loan is $5,000 for the 1st year.

You may also observe that this strategical cost is decreasing over the years. 2nd year the difference is less than $10,000 ( $5,000 x 2 ) and 3rd year is even less than $15,000 etc.

Limiting strategy cost no matter how the market goes is a very powerful situation in investment.


Labels:

Comments

Post a Comment

Popular posts from this blog

What is really important in Personal Finance Planning ?

There is a great video I have seen in LCF  where he talks about Insurance Investment Retirement Tax Estate Planning Although I may not agree to all points but it is actually quite good and all points presented professionally. Some of my pondering points 5-6% investment cost is NOT LOW Actually whether an investment cost is low or not is always relative.  For example, if you are paying 20-30% to others to manage your portfolio then it is lower to find one that is 5-6%.  Likewise, paying 1-2% fee when you manage your own investment is common.   So it is really a matter of your money vs your time.  If you pay more fee, you would expect better services just like any other things in life. Thousands of saving on tax can be compounded to millions While its true you could save on tax but usually its not in a huge magnitude.  To save thousands in tax, you probably have a certain amount of much bigger income to start with.   Its more toward FREE money vs ignora...
Post a Comment
Read more

Find out Your Life Purpose in 5 minutes !

Answer these 5 questions Who are you ? What do you love to do ? Who you do that for ? Is it their Need or Want ? How would they change from what you do ? Example:   I write personal finance articles so that anyone can be richer everyday I sell salt lamps so that Asthmatic people can sleep better at nights I drive all the business men in London so that they are always on time I write philosophical topics so online readers can have an inner peace stronger mind. Please write down yours in comments below ~
Post a Comment
Read more

Resep Membuat Arem Arem Isi Ayam Wortel Special

Arem Arem Isi Ayam Wortel - Arem-arem merupakan makanan serupa kue lemper yang digulung dengan daun pisang lalu diberi isi sambal goreng, sosis, mie goreng, ayam wortel dan sambal goreng. Untuk daun pisang, sebaiknya bunda memakai daun pisang kluthuk supaya hasil bungkusannya bagus saat dikukus. Dan sebelum daun pisang diberi nasi dan isi, hendaknya bunda menjemur daun pisang terlebih dahulu sekitar lima sampai sepuluh menit supaya daun pisang tidak robek saat diberi nasi dan isiannya.  Jika melihat sekilas, arem arem dengan lontong pasti akan terlihat sama karena sama sama dibungkus dengan daun pisang lalu di kukus sampai matang. Namun jika kita melihatnya dengan lebih teliti lagi maka akan terlihat jelas perbedaan arem-arem dengan lontong. Kalau arem-arem umumnya sama seperti lontong, hanya saja arem-arem didalam nasi terdapat isian daging cincang, atau sayuran. Cara membuat arem-arem dapat dibilang mudah dan bahan-bahannya juga terjangkau ditemukan seperti wortel dag...
Post a Comment
Read more