Property investment is a favorite subject for investors in Malaysia. Many investors have made good profit from property for the past few years and even more are desired to be part of the game. Property is the ultimate investment tool. Not only property provides cash flow but also capital appreciation that works for investors in passive manner. If you compare property with any other investments, property always comes out as the overall champion. So, how does property compare with silver?
Let’s compare property with silver in 3 different aspects:
Property is a great tool to receive cash flow. Fundamentally good properties always have high rental demand and yield very good cash flow. The best thing a property investor could do is to divide a large apartment (or a double storey house or shop lot) into many partitions and start renting them out to maximize rental return. It is always more profitable to rent out smaller rooms than renting a property as a whole. The downside is, it is more work to rent separate small rooms compared to a whole unit. In silver, cash flow is almost non-existence. A silver investor do not receive any cash flow no matter what silver he invests in. There are precious metal investment programs that provide “interest” or “dividend” or any other forms that carries the similar meaning, but that often doesn’t end up well. In silver investment, the only exception that provides cash flow is to start trading silver as a bullion dealer. You buy a piece of silver for RM120 and resell it for RM135. That is a cash flow of RM15. Some might argue that is running a trading business and it’s not a investment. Well, renting out a property requires certain amount of work too such as renovation, arrangement for furniture, finding tenants, collecting rental, up-keeping maintenance, etc. In both property and silver, it depends on how much effort the investor wants to put in order to receive the cash flow.
Both property and silver provide capital appreciation. For property, since 2008 till date, price has increased significantly. There is no absolute number to measure how much property price in Malaysia has increased as different locations, different types of property, or even different units of property in the same project might face different capital appreciation return. In property investment, there is also difference between asking price (the price that the property agent / owner wants to sell) and transacted price (the price that the new buyer bought it for) hence it is really challenging to provide an exact number how much property has appreciated since 2008. However if anyone has been following the increase of property price, it’s totally not surprising to find out property price has increased for anything between 100% to 150% since 2008. On the other hand for silver, since November 2008 until November 2012, silver price has increased approximately 200%. It is much easier to measure the appreciation of silver price by tracking silver spot price but nevertheless there are different type of premium for silver.
In investment sense, leverage often means using OPM (other people’s money). In property investment, an investor has leverage of 1 to 10 ratio. Example, a person has RM20,000 can buy a RM200,000 property by borrowing the remaining 90% from the bank. Banks love to borrow money for property buyers as the loan is backed by a physical asset. If you understand how a home loan works, banks charge the maximum interest in the early years and ONLY allocate your repayment to knock off the principle portion at the end of the loan tenure.
Any “misbehave” while serving the loan (such as defaulting payment for 3 months), the banks have the rights to raise your interest from -2.4% BLR to +2.5% BLR. If we take today’s interested rate at 6.6% and you are getting a -2.4% BLR, your actual interest rate is 4.4% (6.6% – 2.4%). If for whatever reason you could not pay the installment for 3 consecutive months, the bank could increase your interest rate +2.5% BLR which is equivalent to 9.1% (6.6% + 2.5%). From 4.4% to 9.1% in a more layman perspective, that means if you take a loan of RM200k for 30 years at 4.4% interest, you are paying approximately RM1000 as monthly installment. If for whatever reason the bank increases the interest rate to 9.1%, your installment will now be slightly more than RM1600. From another aspect, if your property value appreciate for 10% from RM200,000 to RM220,000, you are making 100% return from your RM20,000 down-payment. However when your property value depreciate for 10% from RM200,000 to RM180,000, you are making 100% lost on your RM20,000 down-payment. When that happens, really quiet a tough situation to be in. Leverage is a double-edges sword, it can cut your enemy, it can also cut you.
For silver, leverage is again almost non-existence. There is no bank that will borrow you to invest in silver. Well, when there is a will, there is a way. You can take a personal loan or use over-draft facilities to buy silver, but that is highly not recommended. The fluctuation in silver price is too huge to use a loan to invest for one simple reason: the interest on the loan is a constant (fixed) while the return is unknown. Silver price could go up and come down in different time of a day. There is no benchmark for silver price movement. Taking a loan to invest in property is a calculated risk (if you know what you are doing), but taking a loan to invest in silver is purely putting yourself in risk that has no form of systematic way to calculate the risk vs return. It’s just pure risk. This act is comparable to gamble away your money in Genting Highland!
It is rather challenging to define a clear winner in investment. However if we look into the minor details, property often comes out as the overall champion. So, why are we still looking into silver investment? No doubt property is the ultimate investment tool, the reason why we are talking about silver investment is because the cycle that we are in right now. The cycle for property is almost over, transaction is low, appreciation is not growing as the previous years, prices has gone way above affordability level. Silver on the other hand has tremendous upward potential, affordable where every middle class can afford to buy 1 oz of silver every month, and silver has strong physical demand in both industrial usage and investment demand.
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