Have you ever heard of The Compression Loan: Malaysias Property Investing Secret? If there’s one thing Malaysia should be famous for; it’s for being able to get things done one way or another.
Ever wonder how people manage buy multiple properties at once?
Are they really that rich?
How do they manage to do that with decreasing loan margins?
It’s through using a process that has become known in Malaysia as the Compression Loan.
The Compression Loan is basically the idea of applying for multiple loans from different banks. That’s hardly a secret though. Most everyone will apply for loans from multiple banks to see which one gives them the best interest rate on their loan.
What’s the secret then?
Instead of applying for the same property, you apply for different ones at the same time. This way your TDSR remains the same, as you ‘technically’ don’t have any loans until you accept the offers from the banks.
This means that if you apply for loans for 5 different properties, the banks will all offer their loans and you are able to accept all 5 loans if approved.
A tip that some agents have given me is that, it is best to try keep the value of the properties all roughly around the same price (or at least within a RM100,000 of each other) as if there is a significant difference, it might raise some red flags.
So does that mean that this is illegal?
At the moment, nobody has ever been charged for this but it was noted on propsocial, that being caught doing this is an offence and can result in a jail sentence of at least 6 months.
Seeing as how nobody has ever been charged, I feel that if they were to put a stop to people doing this, they would come up with a new bill or the banks themselves will come out and change their lending rules before anyone is actually arrested.
There have been rumors going around that you are already unable to use this method as banks have tightened their lending checks but I personally know of some investors who have just recently purchased multiple properties using this method – so at the moment, it’s still possible to do but I am not sure if the new Pakatan Harapan government will continue to turn a blind eye to this.
I am not recommending anyone go out and do this, I have personally never done this before, it’s just my opinion on the matter. Don’t take whatever you read on the internet at face value – Always do your own research.
Remember that being offered 5 loans, means that you need to make 5 times the monthly loan repayments, pay 5 times the property taxes and have 5 different units to renovate. Using this technique can be useful but only when used correctly and within one’s means.
Though now having become a relatively well-known strategy among veteran property investors, ‘compressing’ your loan might not be the secret you thought it was when you first started reading.
But does there lie a deeper and darker secret behind the compression loan?
There is no data available on how many people have used this strategy, but it has me wondering whether it could have contributed significantly to the problem of Malaysia’s current property oversupply.
It doesn’t take a genius to realize that using this technique, when used in groups would bring about the most benefit to investors.
From what I’ve been told, there are legal documents that can be drawn up to protect both the person applying for the loan and the people funding the purchase.
It can be surmised that there are many large groups of relatively wealthy individuals who pool their money together to buy property this way. If one person can buy 10 under a single name, a single group would be able to accumulate vast numbers of property very, very quickly.
As with all things bought in bulk – there are always discounts.
Buying 10 or more units directly from the developer makes for an easy bargaining tool and can result in an overall reduction of at least 10% on the purchase price of the unit. Developers are more than happy to offer these deals because they know that the same group of people, are likely to buy from them again in the future. (Not to mention developers already have their units’ prices at very nice margins so, there’s a lot of wiggle room where it comes to discounts and rebates.)
Imagine if these groups were buying not just 10, but 20 or 30 units at each time, and then imagine there being at least 30 of these groups.
That’s a lot of property that ends up going to the same people at a lower than market rate price.
What are the repercussions of this going on at large scale for a long period of time?
Property developments sell out quicker, locking in developer profits and creating more free cash flow for new projects. Developers are then able to build more, simply because they can sell more.
Allowing these large groups to buy multiple properties at a low market rate also gives them a huge advantage over normal investors in the rental market. As their repayments are less, they can afford to lower their prices and bring the average rental rate down of the entire development.
This will lead to regular investors also bringing down their rental rates, resulting in an artificially low rental rate compared to the purchase price of the property. Yet these investor groups still are able to maintain positive cashflow or at the very least bleed a few hundred ringgit a month.
The Star reported earlier this year that just 6 developers would launch property developments of more than RM6.29 billion over the course of this year alone despite the fact that the number of unsold residential units increased by a whopping 40% from 2016 – 2017.
The developers definitely have this info, yet they don’t seem very concerned.
Do they know something we don’t?
How much of a part to play, The Compression Loan: Malaysias Property Investing Secret, has had in the current property oversupply and low rental rates, is hard to say for sure.
There are many other factors which have contributed directly and indirectly to the oversupply, some examples being the Developer Interest Bearing Scheme (DIBS) and land hoarding by developers – so just how much is the compression loan to blame?
Regardless of the part is has played though, Malaysias Property Investing Secret – The Compression Loan, still stands as a very useful technique to buy up properties en masse, at least for the time being anyway…