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.


Comments

Popular posts from this blog

Cara Membuat Salad Buah Segar Yang Enak dan Praktis

Cara Membuat Salad Buah - Assalamualaikum Bu Ibu, yang seger-seger numpang lewat ya. Hayoo siapa sih yang bisa menolak kelezatan dari salad buah ini? Terbuat dari buah-buahan segar seperti strawberry, kiwi, melon, kelengkeng, naga merah, semangka dan pepaya yang dipadu dengan dressing yang creamy pasti mantul banget kan. Apa lagi jika dinikmati selagi dingin, endeus! Cara membuat salad buah yang enak dan segar tentu saja cukup mudah. Bahan-bahan yang digunakan juga terjangkau dan mudah ditemui dimana-mana. Selain buah yang sudah saya sebutkan di atas, Anda juga bisa menggunakan buah lainnya sesuai selera. Namun untuk saus atau cream yang akan menemani potongan buah tersebut harus tepat. Tidak boleh terlalu asam, terlalu manis dan juga jangan terlalu gurih. Pokoknya harus pas manis asam dan gurihnya, agar salad buat yang Anda buat enak dan tidak bikin eneg saat dimakan.  Tips sukses membuat saus salad buah yang segar dan tidak eneg adalah gunakan yoghurt plain. Kenapa? ...

New Sabah Property : HOT !

Famous Feng Shui sifu said that new sabah property is going to continue to be HOT for the next 20 years. As a matter of fact, he refers to both Sabah and Sarawak. Some may have already seen that properties development have been on the rise in East Malaysia for some time now especially in Kota Kinabalu, capital of Sabah. Although there have been critics that such a trend has no sustainable growth and therefore they considered it a bubble rather than a living standard up scale. However it doesn't really matter how right they may be or how noble you are, the market doesn't really care. If it continues to have more buyers than sellers then the price will continue to trend up, despite anything else i.e. no one actually utilize those properties. It shouldn't be too hard to understand the rise. First of all, Borneo is an island. Island has limited land. So 'eventually' the price of land will rise. Its been proven in Japan, Hong Kong Island, Singapore and even Aust...

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 ~