A friend of mine who is a sales manager in an online company told me that she earned 50% profit the other day as soon as her new property was completed. I said, do you own the property or are you paying loan for it? She said she paid just 10% for the property which is RM30,000 for a RM300,000 property and the selling price is now RM450,000 which is extra RM150,000. She bought the property 4 years ago. Let us see what she has really earned in terms of %.
Four years ago, she invested RM30,000 as 10%. If we add all the other things like lawyers fee, interest payments etc, perhaps it comes to RM40,000. If you have invested RM40,000 in FD and left it untouched for 12 months, it’s RM1,200 interest. If we calculate the compounded interest over 4 years period, total interest you earned is RM5,020. Seems ok. However, on the other hand, with this property, she is earning RM150,000 which if you do the below simple calculation showed she earned 90% in ‘interest’ on a yearly basis.
RM150,000 (gross profit) / RM40,000 (gross investment) / 4 years = RM37,500 per year or in simple % is 90% per year.
If I were to tell you that you may earn 90% interest per year on your investment, you would tell me, it must be a scam. In property investment, if you are very lucky, you may be earning such a return. BEWARE though because IF the property price does not increase when it is completed, then you may be suffering negative returns from your initial investment. Thus, the balancing act of risk versus profit must be considered very carefully and seriously because the truth is, initial investment itself is HUGE. This, versus the risk of FD which is nearly zero.
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