Scared of Compounded Interest

Over the last hectic weekend, having some debate and discussion on the compounded interest rate with newbie property investor.

Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t ... pays it.” - Albert Einstein
Sometimes, you just overlook the compounding interest to your loan when there is increase of interest rate. Remember, you are going to be paying for it.

http://www.iproperty.com.my/news/9024/tips-to-be-a-smart-strategic-mortgagor
http://www.iproperty.com.my/news/5057/doubling-property-investment-returns-through-blr-management

With the hike of interest from historical low in 2009 of 5.5% to 2014 of 6.85%, which is the highest since 2000.
Or maybe in future with the hike of interest in following:

2014 6.85%
2015 7.00%
2016 7.55%
2017 10.25% (economy crisis)

What is your risk management on the investment properties, assuming you are not selling:
A. Increase monthly repayment
B. Deposit lump sums to reduce outstanding principle amount
C. Do nothing, continue monthly repayment as in letter offer
What is your thoughts?

For me I will choose "C" and increase my rent to match my current cash flow.
Because at that time, people only willing to put their money in their bank to generate higher interest.
Any other investment will be not attractive. No one will buy into property and need to fork out more interest rate to the bank.
So the demand for the rental properties will rise.


Other may say What about choose "A" and increase the rental at par to the monthly repayment?
There is no right or wrong. The most important is WHY you choose each of those option.
For me, since the tenant is paying the interest, why need to fork out more money from my own pocket?
Why not use the excess money to buy more investment property?
If you are choosing this, u must be still calculative on the interest charge by the bank.
You are not very familiar with the strategy of "OPM" and not applying well. You have to get out of this thinking.

A lot of people are scared by the compounding interest shown in the above articles.

My advice is you have to used the compounding interest to your advantage. not to unfavourable to us.
If interest can be compounded, why the return cannot be compounded?


So are we saying that we must targeting high CAGR?
YES and NO. It depend on the each strategy. If you buy and hold, then the cash flow is important. If for flip, cash flow and CAGR is the 2 primary index.

Scenario 1:
I invested in RM30K, monthly cash flow is 0.Exit in 5 years and cash out RM60K, what will be my CAGR?

Scenario 2:
Invested in RM30K, monthly cash flow is -RM100, exit in 5 years with RM60k (exclude monthly cashflow),what will be my CAGR (Include monthly cashflow into calculation)?

Scenario 3:
Invested in RM30K, monthly cash flow is RM50, exit in 5 years with RM60k(exclude monthly cashflow),what will be my CAGR(Include monthly cashflow into calculation)?

Which scenario can you keep doing every month by your own or with a team?
Which one is more favourable?

Answer for the above 3 scenario:
Scenario 1: 14.87%
Scenario 2: 12.47%
Scenario 3: 16.00%
Scenario 3 is the most ideal?


Of course Scenario 3 is the BEST follow by Scenario 1 and Scenario 2.
Scenario 2 isvnot bad, but must have strong holding power.Otherwise, cannot buy more.
When buy more under Scenario 2, it will be under very high risk category.
During economy slump,if 1 person no holding power,the property will be auction off.
However, if with team effort, then we can do more on Scenario 2.

Say 1 property is on scenario 2 but the -ve cash flow is shared out by 5 person.
Each team member can afford to pocket out Rm200 per month in any conditions without going into deep pocket.
That means the whole team can afford to have negative cash flow at RM1000 per month.
In another words, the team can acquired 10 properties under scenario 2.

With CAGR 12.47% after 5 years, you sell 8 units and free 2 units.
Can you repeat now with greater and faster rate?

At the end, it is the strategy that make it work and how do we employ.

Do it alone,it is slow and not much to play.

That is the reason,why need to buy each unit for 1 month.