Debt is stupid

“Debt is dumb. Cash is king.”
– Dave Ramsey, American millionaire, author and radio personality

“The Last Dance”

Early this week I went Johor Bahru to watch the original Cantonese version of “The Last Dance” (破地狱). The Hong Kong film has broken six box office records, including highest opening day and total gross, taking in HK$100 million revenue 20 days after release.

Every hour there were two to three screenings of the movie. Despite this, the theatre was almost full during off-peak hours on a weekday.

I was well prepared with a pack of good quality 3-ply tissues. This came in handy when everyone in the audience was crying or sobbing throughout the screening. No one expected to shed so many tears after paying just fourteen Malaysian ringgit.

The movie is about funeral business. Those who join the industry either need to succeed their family business or to make money in desperation. The main character is the latter. His own business was doing well until the pandemic struck. Fate changed him from a wedding planner to a funeral planner.

There is a famous quote in this film, “It’s not just the dead who need help out of hell. The living also need help out of hell. Living people also have a lot of hell.”

Everyone has his own hell. In “The Last Dance”, the main character’s hell is financial distress. He lives in the living hell of lenders chasing after him to settle outstanding loans and unpaid bills.

Many individuals and companies file for bankruptcy every year. Think they have financial problems or a failed business? Wrong. On the contrary, they can be doing well financially. They have a good credit history and never miss a debt repayment, until the banks suddenly tightened financing and called back the loans.

From a millionaire to a bankrupt

Dave Ramsey is a self-made multi-millionaire, New York Times best-selling author and a radio personality. At 18, he passed the real estate exam to be a property agent. The job supported him through college. With his savings, he bought houses and flipped them. When he was 26, he already owned a property portfolio worth US$4 million and had a net worth of over US$1 million. He was making US$250,000 taxable income a year or over US$20,000 a month. Growing up in a blue-collar neighborhood in Tennessee, he was considered wealthy by all standards. That was 1986.

In 1987, his bank, the largest bank in the state, was sold to another bank. They found a 26-year-old who owed the bank US$1.2 million and decided that he was over-leveraged. Although he didn’t owe a single payment, the bank recalled all the loans. When his second largest lender learned this, it called back a US$800,000 debt. With his money all tied up in properties, Ramsey was unable to pay. He filed for bankruptcy in 1988 and lost everything he owned.

I was taken aback. This could have been me!

Similar to Ramsey, in the mid-2000s, I also bought one investment property after another with leveraging. I too borrowed over a million from the bank. During the global financial crisis, the bank could have decided that this single-income borrower in her early 30s was over-leveraged. If they had called back the loans, there was no way I could settle the debt. My money was all tied up in properties. For each home, it would take four to six months to find a buyer and complete the transaction.

Leveraging is a double-edged sword. It can make you rich. But it can also ruin your life overnight.

Banks have the right to recall debt

Banks need to grow their credit business. Bankers need to meet their quota. On normal days, they approach you, lend you money to expand your business or fulfill your financial need. On rainy days, they are faster than anyone to cover their back and control bad debt.

It’s naïve to believe that leveraging is a smart tool to acquire assets and grow wealth. It is, until one day the lender wants to limit or end the relationship.

I am the customer. They can’t do that to me. But who owes money? Who has the upper hand, the lender or the debtor? In the agreement you signed, it said the bank has the right to recall the loan anytime.

“Banks lend customers umbrellas on a sunny day, but they take them back when it is pouring. For uncompleted residential projects, there is a time lag between the loan offer and the disbursement date. Anything can happen in between.

Under the Black Swan of the subprime crisis in 2008, banks in Singapore tightened lending to property buyers who bought off-plan properties. They suddenly offered lower LTV or withdrew previously approved loans. Many homebuyers bought at high prices in 2007 and were caught totally unprepared. With the decline in valuation, they could not find any bank loan to match their original purchase price. They were asked by their banks to put in more cash to secure financing. When they couldn’t raise the money, they were forced to dump their properties in a depressed market.”

– Vina Ip, Behind The Scenes of The Property Market

Thank God the 2007 financial crisis didn’t last very long. After they tightened uncompleted property loans, the banks would have targeted over-leveraging of existing mortgage. And I would be next!

I was young and naive

When I launched the first book No B.S. Guide to Property Investment in 2014, I had interviews with the media to promote my book. That was a bull market in real estate, with low interest rates and new launches 100 percent sold out on their first day of launch. The media were all interested in how I earned the pot of gold in properties.

However, they completely missed the point. When I invested in properties, I was still young and didn’t have the wisdom to see the danger and risk underneath.

Debt is a double-edged sword that can easily turn against you once the market direction changes. You can fall from the top and lose everything. Those who start from a humble background may have the resilience to get through. The rest are stuck and never recover.

“I have purchased both mortgagee sale and fire-sale properties from owners who have overcommitted in a thriving property market. I have seen many investors being burnt badly by their wrong or untimely property investment. They could have avoided the negative outcome had they abided by the 3-3-5 rules before their purchase.

In a few property viewings, I was told that the owners were close to bankruptcy. It must be a big blow to them seeing the Official Assignee sell off their home against their will. The worst thing in life is to end up in a situation that you are not given any choice. When you are out of options, you will be forced to do something you don’t want to do. This is when you can no longer live with dignity. The pain and trauma are going to last for a long time.”

– Vina Ip, Behind The Scenes of The Property Market

Bad debt is good debt turns awry

In finance, we are told that bad debt is borrowing money to buy consumer items and depreciating assets. In contrast, good debt is a loan to invest in something that can grow in value, generate long-term income and increase net worth.

We feel good when we put our savings into real estate. We thought buying a property proves that we have good money habits. There is good financial planning. And we know how to invest and grow our wealth.

As Dave Ramsey said, “Debt gives you the ability to look like you’re winning when you’re not. Debt is not a tool; it is a method to make banks wealthy, not you. The borrower truly is slave to the lender.”

But no one tells us that a bad debt is just a good debt gone awry. It is not about whether you can pay back or not. It turns bad when the bank decides to tighten borrowing and considers your case over-leveraging. If you can’t return the money now, the good debt immediately becomes a bad debt.

Singapore is famous for high saving rate. The latest personal saving rate (percentage of personal saving out of personal disposable income) is 32 percent. When the valuation of your mortgaged home drops, you have the obligation to repay the difference to the bank in cash. If you don’t have enough liquidity, it’s your problem.

If your property is on mortgage, in legal terms, the mortgagee bank owns it. Unless you pay back the loan in full, you don’t have the title of ownership. It is under the bank. It has the right to call back the loan and repossess the property any time.

As Dave Ramsey realized after he was insolvent, “The borrower is a slave to the lender. Debt is stupid.”

3-3-5 rule is not good enough

When someone tells you “buy now or you will regret”, it’s a joke. It’s likely “buy now and you will regret”. Just look at your stuff at home. The things you wish you haven’t bought are more than the things that you wish you have bought.

Ramsey said people don’t “act their wage”. It is dumb to buy things you can’t afford, with money you don’t have, to impress people you don’t like.

How do you know you can afford? When you can buy in cash. So stop borrowing money and start using cash.

Ramsey said, “I do recommend that most people sell the car with the most debt on it. A good rule of thumb on items (except the house) is this: if you can’t be debt-free on it in eighteen to twenty months, sell it.”

“When I do something stupid with money and lose it, I call that Stupid Tax. I have paid so much Stupid Tax that I am an expert.”

In 2014, I came up with the 3-3-5 rule as a guideline to check a property’s affordability:

1) Your initial capital should at least be 30 percent of the property’s asking price.
2) Your monthly mortgage payment should not exceed one-third of your monthly salary.
3) The purchase price of the property cannot exceed five times of your annual income.

Even after the CPF Board endorsed my 3-3-5 rule, many still criticize it as too conservative.

Conservative? Read Ramsey’s advice on maximum borrowing for your home:

“I tell everyone never to take more than a fifteen-year fixed-rate loan, and never have a payment of over 25 percent of your take-home pay. That is the most you should ever borrow … A lower interest rate doesn’t make a debt go away.”

Food for thought

The dream of every value investor is to buy at the bottom of the market when there is blood in the streets.

China tycoon Chen Hongtian has lost at least US$1.4 billion worth of Hong Kong and London properties to creditors. Cheung Kei Center, a Grade A office building in Hong Kong under Chen, used to value at HK$7 billion in 2022. Two weeks ago, China Mobile submitted a takeover asking price of HK$3 billion. That was a whopping 57 percent discount!

Last week, Hong Kong Metropolitan University acquired the distressed commercial property at HK$2.6 billion. How can the university snap the deal with a HK$400 million lower bid? Because China Mobile suggested payment in instalments, while the university’s offer was a lump-sum cash payment.

When times are bad, cash is king.

My book Behind The Scenes of The Property Market is available for preview and order online.

If you need advice on property matters or residential properties in Singapore, you can check out my one-to-one consultation service.

Check out my new online courses How To Buy Good Quality Properties and Buy The Right Condos.

You can watch the recording of the presentations at the 2023 Mid-Year Singapore Property Review and Outlook seminar.

The video 2023 Singapore Private Home Market is available for viewing here.