Dividend Magic

Saving and Investing towards Financial Independence in Malaysia

FI/RE

My Real Estate Portfolio

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Filed Under: FI/RE, Investment, Real Estate 14

Real Estate I Currently Own

It is not in my nature to write about things I do not own or understand. Unlike most ‘experts’ out there who preach and sell products that they themselves would not invest in. So, full disclosure here, apart from my investments in the stock market, my humble real estate portfolio consists of 2 low-cost rental apartment units in Kuala Lumpur.

A brief summary on my properties:

  • I’ve managed to secure stand-up tenants;
  • Both properties are financed by banks; and
  • Both properties are held under a Sdn Bhd I own.

Property A:

Real Estate - Property A

  • RM224 a month positive cash flow translating to an ROI of 17.74% p.a. (I’ve factored in the relevant maintenance costs etc);
  • Appreciated roughly RM25K in value as at March 2016;
  • I bought Property A through an auction about a year and a half ago, I managed to gain access to the property and rented it out for almost a year before I started paying my loan (will have a separate article on how I did it soon);
  • Currently tenanted at RM700 per month.

Property B:

Real Estate - Property B

  • RM183 a month positive cash flow translating to an ROI of 8.08% p.a. (I’ve factored in the relevant maintenance costs etc);
  • Appreciated roughly RM20K in value as at March 2016;
  • I bought Property B through as a subsale unit;
  • Currently tenanted at RM750 per month.

So, why real estate? I was hesitant to invest in real estate because I knew it would take up a lot of my time and effort to maintain a rental property. What made me take the plunge was the leverage I was able to get from banks to invest in real estate. Essentially, I only needed to put up 10% of my own money for the property and the bank would fork out the remaining 90%. This would have been impossible for stocks, even margin accounts don’t give you that much leverage for your money.

I decided from the start that the properties I own will have to be close to where I live to facilitate monthly inspections and the likes. I also made sure that I would be able to get a surplus income after deducting all related expenses. Which is why I ended up with low cost apartments because only those made financial sense to me.

1. Cash flow, cash flow, cash flow!

Cash flow is the extra profit left over after all of the expenses have been paid on a property. Using my properties as an example, my rental properties produced RM1,450 in income and my estimated expenses came to RM1,050, this would leave me with a positive cash flow of RM400 per month.

Now, I know a lot of you are saying, “Four hundred dollars is not going to make me a millionaire.”

Probably not. But remember, we are just talking about one of my asset classes.

Additionally, that RM300 might be from just one property. If I owned ten similar units with the same cash flow, that’s RM3,000 per month. If I owned 100 units, that’s RM30,000 per month. This cash flow can go a long way toward helping you quit your job — or helping you save for a future big purchase, or retire wealthier.

2. Appreciation

When I talk about appreciation, I am not referring to how much I like you (though I do appreciate you!). I’m in fact referring to the rise in value that real estate experiences. For example, if you purchased a property for RM200,000 ten years ago, and today that property is worth RM300,000, the appreciation made you RM100,000 richer!

Of course, appreciation doesn’t cause values to increase every year (consider the U.S.’ housing market in 2007!). However, historically, real estate prices have appreciated over the long term. So, again, appreciation alone is not likely going to make you a millionaire, which is why I don’t recommend that people purchase bad deals hoping that appreciation bails of them out.

It has never made sense to me when people purchase properties in the hopes of the making capital gains on it while servicing their mortgages every single month. Just like how I am acquiring shares with awesome dividends, I buy my properties that provide me with essentially the same thing – postitive cash flow. That way, my tenants will help me service my mortgage and I receive the remaining dollars.

3. Tax deductions

Finally, one of the more overlooked parts of real estate investment.

Back in 2014 I incorporated a Sdn Bhd for as a holding company for my investments and decided that the way forward for my real estate portfolio was to park them all under the company.

Although I had initially planned to only park my commercial properties under a Sdn Bhd, I realised that the low cost apartments will always be investment properties for me. (A side note: please do consult your solicitors or counsels on the pros and cons of placing your real estate under a Sdn Bhd before you attempt it.) I will have a comprehensive article on why I chose to have my properties all registered under my company in the future.

Putting it all together

So far, my main source of passive income comes from my Freedom Fund‘s dividends, earning me a total of RM7,544.14 last year. My real estate portfolio should earn my about RM4.9K per annum this year. I hope to snap up a medium cost apartment or a commercial property in the future and bring my annual real estate income up to RM10K p.a. in the foreseeable future.

Instead of a physical property, some of you may be interested in investing in Real Estate Investment Trusts (REITs) in the stock market. You are able to get access to large real estate including shopping malls, office towers as well as hotel chains through REITs. Learn more about them here in my Complete Guide to REITs in Malaysia.

Private Retirement Scheme in Malaysia and My Fundsupermart Holdings

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Filed Under: FI/RE, Investment 10

My PRS Holdings

Update: There is currently a campaign on Fundsupermart giving RM40 in credits when you invest RM3,000 in a single transaction: Link hERE.

Referral link: hERE (discount on fees)

I use Fundsupermart as it is easy and I can do everything online. Rates are good as well. However, I do not recommend going over RM3,000 a year as that is the maximum tax relief. You’re still paying fees every year and you know how I feel about them fees.

Below is my updated PRS holding for 2023.

I’ve invested for a few years now.. so the 24% returns are really nothing to shout about. I do RM3,000 every year for the tax relief that’s all.

What is a Private Retirement Scheme (PRS)?

The Private Retirement Scheme in Malaysia was launched approximately 4 years ago back in mid-2012 as a supplement to the Employee’s Provident Fund (EPF) because it was found that most Malaysians relied solely on their EPF for retirement which was severely insufficient. The PRS is a defined contribution scheme which in simple terms – you decide how much you contribute and is regulated by the Securities Commission of Malaysia. The entity that administrates and handles PRS is the Private Pension Administrator (PPA), every Malaysian interested in contributing to PRS is required to create an account with them (more on this later).

Private Retirement Scheme (PRS)

Photo source: PPA

Benefits of PRS

So, why contribute to PRS?

PRS Tax Relief

The Malaysian government, in a bid to encourage everyone to fund their retirement provided a few benefits in the form of tax reliefs and a PRS youth incentive. Individuals who contribute to a PRS can enjoy up to RM3,000 tax relief per year of assessment. Many confuse this as RM3,000 saved every year when you contribute.

This is not the case, instead, think of the RM3,000 as the cap, if you invest RM3,001 in a PRS, you only get the relief of up to RM3,000. So, potentially an individual taxed at the highest rate can save up to RM780 per year in taxes if he/she contributed to a PRS. This however makes contributing more than RM3,000 a year unnecessary.

As per the table below, you will notice that the maximum savings an individual can get is RM780, if he is in the highest taxable bracket and is taxed at 26%.

PRS Tax Relief Table

PRS Youth Incentive

The PRS Youth Incentive is an initiative by the Malaysian government to encourage young Malaysians to start saving and investing for retirement. A one-off incentive of RM500 will be contributed by the Government to Malaysian individuals who qualify for the incentive.

Who is eligible?

  • Malaysian citizens only;
  • Aged between 20-30 years;
  • A minimum gross investment amount of RM1,000 must be accumulated in a single PRS fund of a single PRS provider within a calendar year, between 2014 till 2018

With the above-mentioned incentives, I myself have contributed RM3,000 every year to a Private Retirement Scheme through Fundsupermart. I chose them because prior to PRS, I’ve been investing in Unit Trusts and Mutual Funds through them. Everything is done online and is simple to follow. Some of the forms will require your signature and thus will be mailed/couriered to you. You may sign up for an account here and follow their instructions.

I chose to contribute to the PRS funds as seen below:

PRS Fundsupermart

There are a total of 8 PRS Providers:

  • Affin Hwang Asset Management Berhad
  • AIA Pension and Asset Management Sdn. Bhd.
  • AmInvestment Services Berhad
  • CIMB-Principal Asset Management Berhad
  • Kenanga Investors Berhad
  • Manulife Asset Management Services Berhad
  • Public Mutual Berhad
  • RHB Asset Management Sdn. Bhd.

The Disadvantages of a PRS

Yes, I invested in a PRS and the tax relief as well as the RM500 youth incentive wasn’t too bad. However, a Private Retirement Scheme is in essence a Unit Trust / Mutual Fund, and you know how much I hate them here in Malaysia as I’ve mentioned in my previous post Fundsupermart and Unit Trusts in Malaysia. The same ridiculous fees are charged by the providers regardless if you make a profit or a loss. Notice that my total profit averages to a measly 3.15% after 2 whole years, of course this is not including the tax relief afforded by the government.

Furthermore, your money is locked in until you reach the age of 55. Early withdrawal (with tax penalties) is allowed under some circumstances which are all specified at the PPA’s website.

Conclusion

All that being said, I will still continue to contribute RM3,000 each year solely because of the tax relief which I view as a guaranteed return provided by Putrajaya. I am in no way put off by the long wait till I’m 55 because I have surplus savings. However, the same cannot be said for my fellow Malaysians out there who are struggling to make ends meet.

Will you continue to contributed to a PRS this year? Have you taken advantage of the tax incentives provided by our Government?

Thank you for reading.

Is the First RM100K the Hardest?

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Filed Under: FI/RE, Investment, Portfolio - Freedom Fund 36

Charlie Munger of Berkshire Hathaway has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.

My First RM100K

I achieved my first RM100K in portfolio market value in the mid of 2014. It took me almost three years to get to that point, starting with RM3,000 I saved for 3 months which I deposited into my Jupiter Securities brokerage account in 2011. Learn how to start investing in shares HERE.

What did it take to get from RM3,000 to RM100,000 in three years? 

Well, a lot of hard work, persistence, consistent savings and investing.

I lived below my means day in and day out for years on end. I made a decision to continue living with my parents instead of getting my own place as the property prices were skyrocketing when I first started work. At lunch, I walked out of the air-conditioned premise to a nearby economy rice (‘chap fan’) stall when my colleagues ate at posh restaurants. I couldn’t bring myself to spend RM20 ++ every meal at the office. When I had to stay back to work late, I settled for Maggi and ramen noodles at the office.

Meanwhile, I also put myself in a position to become promoted at work and generate additional income. And I would come home after working for 10 hours to study stocks and try to create additional income above and beyond what my day job provided. I made it a habit of analyzing and looking at at least one new stock every day. I read books and listened to audiobooks on investing during my commute.

I thought about escaping the miserable rat race every single day.

And, perhaps most importantly, I religiously invested all the excess capital generated by living below my means into high-quality dividend growth stocks that rewarded me as a shareholder with growing dividends that allowed me to continue rolling my snowball at an ever-greater velocity.

Sticking To The Plan

What have I been up to since hitting the first RM100K? 

What else would I be up to other than sticking to the long-term plan?
My main asset and focus will always be stocks because it is what I understand and what I know.
And if you need a financial plan for yourself, I’ve got one right hERE for you.

I still live with my parents, even though I now own 2 properties which I’ve decided to rent out. I make it a habit of packing food from home whenever I can. I still choose to order the RM10 lunch set instead of the RM20 one.

And although I’m not eating that much instant noodles anymore (my body told me when enough was enough), I’m also not eating steak and going for buffets daily.

I do however find the time to treat myself to a nice meal or holiday now and then. Of course, all of these are within the budget I set for myself.

Now and Beyond

What has all this modest living, saving, and intelligent investing done for me? 

Well, my Freedom Fund closed at RM254,3482.62 in total market value on 31 December 2015. My modest portfolio produced a 2.97% dividend yield or RM7,544.14 for 2015.

Update (7 March 2017): As at 31 December 2016, my portfolio has a market value of RM345,955.92. That’s almost RM100K a year for me. With the help of compound interests as well as some diligent investing, I hope to keep this RM100K a year trend going.

Update (1 August 2019): As of 30th June 2019, the Freedom Fund is worth RM439,286.24. Netting me a dividend of RM8,938.36 in the first half of 2019.
It’s yield? 2.46%. I know I said RM100K a year back in 2017, I lied.

I’ve certainly also picked my fair share of duds along the way which has needlessly delayed my progress. But hindsight is 20/20, unfortunately.

Nonetheless, this is a real-time and real-life journey. No backtesting. No hypotheticals. No what-ifs, coulda’s, shoulda’s, or woulda’s. Real-life progress, for better or worse.

And I think that’s what I really love about showing how financial independence unfolds in real-time with all the victories and setbacks that occur. It shows that it’s possible without nailing the perfect investment. Mistakes can be made. We can fall down. But as long as we get back up and keep climbing, we can reach the top of that mountain.

And I’ve been climbing, guys. For five straight years, I’ve been climbing. I know the view at the summit will be incredible. And because of that climbing, the portfolio is now hovering at RM250,000. It’s incredible!

But, as Munger said, it helps to start early and roll for a long time. I didn’t start particularly early. I was almost 21 years old before I  opened a brokerage account. But here I am at 26 years old, controlling a portfolio worth RM250,000 that’s chock-full of high-quality businesses across a spectrum of industries. I’m a real estate tycoon. An investment banker. A manufacturer. An insurance giant.

And these businesses will funnel ever-growing cash flow into my portfolio, which begets more cash flow in the future. That passive dividend income should exceed RM8,500 this year. And I haven’t even been rolling the snowball all that long.

Imagine what’s possible in five or ten years? Imagine what’s possible for you in five years?

What has your experience been? Was the first RM100K the hardest? Are you rolling your own snowball? Are you climbing the mountain? 

Cheers and thanks for reading. I will continue updating this post on an annual basis just to keep track of my progress from the first RM100K to my first million.

A Note

I’ve got too many people asking how I got a RM100K jump just from investment etc.

Now, I hope everyone is clear that me getting my portfolio to jump by RM50K, sometimes RM100K a year is not 100% from investment returns. I pump in money from savings.

I have a regular income and I have a business income. So what’s important here, and what I want you to focus on, is my savings rate, my dividend yield, and my portfolio’s IRR.
All of the above metrics are on the first post of my Facebook page and I also update these in my annual reviews.

You may not increase your portfolio by tens of thousands, but your savings rate, your yield is what that matters. If you have a RM10,000 portfolio, with a 10% yield and you save 50% of your income. That’s a huge win. Focus on the right metrics.

For the next article of the FI/RE and Savings Series, check out article 002 – My Portfolio is Built on Frugality.

Dividends – Return of Capital or Return on Capital?

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Filed Under: FI/RE, Investment 2

Return of Capital vs Return On Capital

The difference between Return OF Capital and Return ON Capital.

First, let me quote Investopedia on Return of Capital:
A return from an investment that is not considered income. The return of capital is when some or all of the money an investor has in an investment is paid back to him or her, thus decreasing the value of the investment.

I’ve always thought that this applies more towards investment in businesses and properties, but upon further research, found that it applies to investments in stocks as well.

Dividends - Return of or on Capital

Photo source: dilbert.com

A return on your capital is simply a return on investment (ROI). You invest in a venture that produces a return, and that return is your ROI. It doesn’t matter if this investment produces income or simply appreciates in price. Let’s say you buy a stock that pays no dividend:

You pay RM1,000 for 10 shares of ABC Company at RM100 per share. A year later you sell your 10 shares for RM1,300. So the RM300 profit from the sale is your ROI. That’s a 30% return over the course of one year, which isn’t bad at all. Repeat that over and over again and you should do well.

Now, that scenario worked out pretty well. You likely had to stomach some ups and downs in the meanwhile, but all of your initial capital was returned to you, with a nice profit to boot.

That’s nice and all, but what happens when that asset doesn’t appreciate?

Let’s say you bought those same 10 shares (RM100 per share) of ABC Company for RM1,000, but a year later the Market plays his hand and those same 10 shares are now worth only RM700. You decide to sell on the news as the fundamentals have changed and you net a (RM300) loss on your investment. So you just took a 30% loss, meaning your ROI is a whooping -30%. You not only didn’t receive a profit, but you also took a loss on some of your capital. The capital you now have to reinvest elsewhere is smaller.

DIVIDENDS 

Dividends

Photo source: pencilreturns.wordpress.com

Stocks that do not pay any dividends means your returns are totally at the mercy of the Market. I like to say dividends act as a kind of “buffer” between the market and your capital, and that’s because dividends flow directly from a company to you as a shareholder. They bypass the stock market altogether, and so that’s why you’ve got this interesting relationship going on where they function as both ROI, but also a return of your capital.

When you invest in a company that pays a dividend you’re receiving capital directly from the company. No matter what happens to the company’s stock price, that company is returning your capital. Slowly the capital you initially invested with the company is being directly returned to you in the form of regular dividend payments. So the share price may oscillate wildly affecting the eventual outcome of your ROI (if you ever sell), but your risk is being reduced one dividend check at a time because the capital you initially invested is slowly being returned to you. Eventually, if you hold on to the investment long enough and the company continues to pay dividends during that time frame, all of your capital will be returned to you, meaning any share price appreciation comes with essentially no risk on your part.

Even while dividends do affect your total return as they’re added on to any capital gains you may or may not receive, they also function as a return of your capital as a company you buy shares in sends you regular dividend payments.

So let’s get back to that earlier example, using the first scenario. This time, ABC Company pays a RM3.00/year dividend per share (3% yield).

In the first circumstance, you seen the share price appreciate from RM100 to RM130, but now you also collected RM3.00 per share in the form of a dividend. So your ROI was boosted slightly to 33% – 30% from capital gains and 3% from the dividend. In this scenario, you collected RM3.00 per share directly from the company and RM30.00 per share in capital gains. So not only are you left with RM1,330 when all is said and done in terms of your total return, but the RM30 you received directly from the company means the capital you had at risk, even if the company went bankrupt, is only RM970.

Real-Life Example

Dividend Magic

Enough with the hypothetical stuff, let me give you a real example from my own personal portfolio. For this, I will utilize my investment in IGB REIT and present to you how it has fared so far in the year 2015.

Total initial investment: RM20,030.56
Current Value : RM19,760.00
Capital loss : RM270.56 (-1.35%)

However, I’ve received a total of RM612.56 in dividends for the year 2015. This reduces my capital invested to RM19,418.00. Reversing my position from a loss of -1.35% to a gain of 3.15%.

But there is also a return OF my capital.

See, no matter what happens to IGB REIT from here on out, the capital I have at risk right now is only RM19,418.00, and that’s because IGB REIT has sent me cheques that total up to RM612.56. It doesn’t matter what the Market might think of the company and its future prospects, the business itself has sent me capital. Eventually, if I hold the position long enough and they continue paying dividends, IGB REIT will send me so many dividend checks that they will add up to more than I initially invested in the company. At that point, my capital on the line is essentially NIL. The company could go bust at that point, and I still would have technically lost nothing. In fact, it’s quite possible with a business that pays you dividends long enough that even if it goes bankrupt and you hold all the way through bankruptcy (an unlikely scenario) you would still actually end up with a positive return. Imagine that!