Investing in real estate has become a popular means of diversifying one’s investment portfolio. Largely illiquid, real estate is generally considered a defensive long-term investment and a hedge against inflation.
The unprecedented nature of the Covid-19 pandemic and its impact on the economy, together with existing market inefficiencies, has created an opportunity for arbitrage for the astute investor. The operative words here being “astute investor”, who is well-informed about the financial and market intricacies of investing in real estate.
This apparent opportunity is currently being peddled to the market at large in the guise of investor clubs and classes by investment “gurus”. In some cases it is being touted as a daring method to leverage oneself out of debt, and there has been a fair number of casualties.
Raine & Horne International + Zaki Partners senior partner and Fiabci president Michael Geh said a strategy is being advocated by some property investment gurus, advising prospective homebuyers to invest in more than one property to make fast money at this juncture.
“These property gurus guide potential buyers, especially millennials, to take on multiple financing, also known as loan compression. It is also associated with get-rich-quick schemes. However, this is not a new strategy as it has been practised for ages,” he told Property Advisor.
Loan compression is when one simultaneously applies for a few home loans at various banks. This loophole is popular among investors who plan to purchase a few units/properties at one go and avoid the 70% loan margin for the purchase of the third and subsequent properties.
Geh said some gurus are actively conducting seminars on money-making schemes, which are becoming rampant. “Youth are lured by the thought of making easy money. But, they never know, they may end up having to service loans beyond their financial capability.
“Gurus often say, ‘why buy one when you can buy three properties and be a millionaire?’ It sounds exciting and ambitious, but these millennials will not be aware that they will fall into a trap that leads to bankruptcy.”
Geh discouraged millennials from buying three properties, one is sufficient to start their property investment portfolio.
“Please do not use a compression loan. Do not be a first-time investor and build a property portfolio of RM5 million in the beginning. Do not listen blindly to the advice of gurus. Stay away from financial ruin. You are taking on a huge debt to gamble in a casino.”
Taking a compression loan, he added, is tantamount to defrauding the bank, noting that many takers of compression loans are now facing bankruptcy.
Property consultant, REI Group CEO Dr Daniele Gambero, said too many young property investors are following unscrupulous, self-appointed property gurus, not realising there is no easy way to become a property millionaire.
“Instead, it is very easy to end up being cheated and bankrupt. I believe loan compression is a scam, as whoever uses it is defrauding the banks. It is dangerous, illegal and wrong!”
Gambero said homebuyers should buy something within their means.
“When a property guru promotes a project, saying it’s the best and he managed to get a great secret deal, this means you buy, the developer will be happy, the property guru will be richer and you will have a mortgage to pay!
“Some gurus also suggest it will be very easy to rent, but how sure are they? Who can guarantee such a thing?” said Gambero.
He advised homebuyers to do their due diligence, conduct a compare-and-contrast test, look at the worst-case scenario and, above all, do not be caught in the stress game of very short-term offers.
Bank Negara Malaysia and the Association of Banks in Malaysia view loan compression cases very seriously and have suggested that purchasers be required to make a declaration if the issue persists.
The Real Estate & Housing Developers’ Association also reminded its members of the importance of good governance and practices, as banks will not hesitate to decline end-financing facilities for developers involved in any misconduct.
This article was written by Sharina Ahmad of PropertyAdvisor.my, Malaysia’s most comprehensive source of property data, property analytics and insights.