Thursday, November 23, 2017

After Action Review : Supercharge your REITS investments.



Ok, as I am preparing for my bar exams next week, I would only start writing about yesterday's session only after I am done with all my revision work today.

Here are some points of interest from last night's "non-debate" between myself and Teck Leng :

a) The lack of real debate last night.

The event was promoted somewhat as a debate between an ETF-driven approach versus a DIY approach to REITs investing. When we did the event on the ground, Teck Leng and I probably had much more points in common than actual disagreements. This is what happens when put engineers together, we're more keen to cooperate to find better ways of making money for everyone. Also I really liked his guts because he is quite an earnest guy.

[ If you really want a fight, put me against a legally-trained or marketing-trained ETF fund manager because I know the gloves can get off without things becoming too personal - then I'll thrash him with my superior numbers. ]

You can definitely leverage the Phillips S-REITs ETF and my current Maybank broker offers it at the lowest rate.

b) That 17% tax on REIT ETF dividends.

Even if there was a debate, the biggest elephant in the room that is in my favour is the 17% tax that is levied on trust income. This effectively lowers the dividend yield of the REIT ETF from 5.5% to around 4.6%.

But, let's be reasonable here, it's not the fault of REITs ETF issuer. I was told some readers of this blog forwarded what I wrote about these taxes to some bigwigs at Philips Securities and accused them of pocketing 17% of dividends. This is really unfair to these guys who created a relatively cheap product for investors who want to spend less time micro-managing their REITs investments.

Readers should be glad to know that the industry is lobbying hard to waive these taxes so that less sophisticated investors can benefit from higher yields.

c) Someone shared with me a better way of obtaining leverage.

The cool thing about unbiased bloggers giving talks is that some attendees may have better ideas on investing. After the talk, one cool dude came up to me and proposed a superior approach to getting margin financing from a broker.

He proposed using proceeds from a home mortgage instead to buy equity.

According to him, you can get funding at less than 2% (my current home loan is SIBOR +0.68%). After some thinking, I figure out that if the funding came from the mortgage bank, you can practically buy any stock you want or even buy cryptocurrency with the proceeds. The downside is that you will end up servicing a bigger mortgage instead of trying to pay a mortgage down like me.

I need every reader's help to verify whether this strategy would work or might even be legal in the first place. Banks, for sure, would not give a mortgage above the market value of the property and employing home equity as collateral actually attract higher interest rates towards the tune of 4-5% based on what I know.

But I think this is a good share regardless.






7 comments:

The cool guy :) said...

It's called a term loan and this is how it works.

You will need a
1. private property (you can't do this with a HDB)
2. less than 80% mortgage on your property.
3. Income (because of TDSR)
4. Age not too close to 65

Example.
For simplicity, assume your property is valued at 1 million and fully paid up and that you are 45 years old earning $10000 per month

The banks will be happy to grant you a term loan $800000 using your house as collateral at regular mortgage rates... currently about 1.5% still.

At 1.5%, 800k, 20 year mortgage. Monthly repayment is 3,860. (Note, In order to comply with TDSR you will need to earn about 7k a month assuming no other loans outstanding. Eg car loan)

You can then use that 800k to invest in Reits.

The key benefit with this approach is that you will never suffer from a margin call. Your 800k position might become zero (if you bought Noble) but you would never get margin called

The key drawback is that because you are paying back principal every month, you nett cash flow may not be very high. 7%*800K - (3860*12) = 10k cash flow. Only equivalent to having another 142K of assets generating cash flow at 7% even though you borrowed 800k. You are still building NAV though because the money actually went back to repaying the loan. (Your loan is getting smaller but your 800K reit is still there)

Additionally because of risk that your investment is not able to offset this high outflow, or that the mortgage interest climbs to 3%, you might need to keep a year's repayment as buffer hence you might not invest the full mortgaged sum leading to a overall lower return due to the unutilized capital.

Another limitation is that this only works if you have a sufficient equity to release in your property and you earn a fairly good salary. It will not work for a fresh grad.

Christopher Ng Wai Chung said...

Thanks, this is a solid strategy and share !

Christopher Ng Wai Chung said...

Oh my goodness, I just realised that proceeds from a term loan can be farmed into a margin account !

The cool guy :) said...

Yes you could but that will increase the ways/chances that something can go wrong and also magnify the impacts when something does go wrong... responsible leverage :)

Christopher Ng Wai Chung said...

Maybe in a future article, I will simulate a term loan and a margin account, and then calculate the probability of utter destruction.

Looks fun so long as no one actually tries it.

SGDividends said...

Hi cool guy,

Thanks.. agree with u. Cashflow has to be right .

I believe one can claim rental tax relief on the interest too..correctly me if I'm wrong if u use a rental property

Is there any fee for equity loan like lawyers or processing ?

The cool guy :) said...

Hi SGDividends,

Mortgage interest is not tax deductible in Singapore.

For me it involved moving around with the ownership as well to optimize TDSR so i needed a lawyer to structure. I paid 3k (which the back subsidized). I'm not sure its just a simple equity loan if you need a lawyer, but that is at most 3-5k which a one time cost.

Btw, you can take a equity loan even if you are not the "owner" of the house. DBS for example allows for Mortgagor (owner who pledges house as collateral) to be and the borrower (TDSR salary requirement) to be separate person.