Estate Planning Ideas for Property Investors
I was having lunch with one of my mentors a few weeks ago and the topic of estate planning somehow cropped up. This is an important issue all property investors will eventually have to face. For the benefits of readers, both of me and my mentor are in our mid forties, our kids are about to begin their teenage years and we both have property loans of over RM10 million. Hence we have many common challenges when it comes to estate planning for our properties. This article is not meant to be a substitute for expert estate planning advice but just food for thought.
My mentor shared with me how he and his wife have decided to donate properties worth RM1 million from their real estate portfolio, currently worth over RM15 million, to their church over the next few years. Instead of waiting and doing a lump sum donation like what most people do, they have decided to start, albeit in a small way from this year onwards. So far they have already pledged one of their condominiums worth RM300,000 to their church.
This is what they did. The property is currently under their individual names with an outstanding loan of approximately RM200,000. My mentor and his wife decided to fully prepay the outstanding loan from the profits they had made flipping some of their earlier properties. They then became Trustees for this condominium and they named their church as the sole beneficiary. They would manage the property on behalf of their church and whatever monthly rental income of RM1,8000 per month less of all expenses would be given to their church.
Their plan is to do one similar donation a year until they have donated a total of RM1 million in properties. This was their way of repaying back God for the kindness and good fortune that had been bestowed upon them. Upon their passing, all these properties would then be transferred to their church.
Upon my querying further on their plans, my mentor told me both he and his wife planned to retire as well as stop investing in properties once their combined passive rental income exceeded RM50,000 per month. This was an amount needed to comfortably fund their existing lifestyle as well as their love for overseas travel. Since most of their properties were commercial shop-lots, they had no worries about inflation as the rental of commercial properties usually goes up by 20-30% every few years. They then plan to devote their free time to their church to do God’s work.
As my mentor was a professional property investor with extensive knowledge, it was indeed a big surprise to learn that he was planning to completely stop purchasing properties within a few years time once his passive income target was achieved. Personally, I felt it was a shame to let his wisdom go to waste. With his knowledge and experience, he could have easily continued to do very well in properties.
What was interesting was that I found it kind of ironical that many beginners are putting themselves at great risks with their limited knowledge on property investments, and here was my mentor having decided to call it a day in a few years time. I respected his decision as I guess every one of us need one day to find our level of contentment in life, know when to call it a day and move on to something that brings us closer to God. In my case, I had planned to be more selective on my future purchases and go slower, but it had never occurred to me that I should one day stop totally.
With regards to their children, my mentor and his wife were planning to bequeath all their commercial properties which would have been fully paid off by then. Assuming rentals and prices double in 20 years, his children would be inheriting properties worth over RM30 million with rentals of over RM200,000 every month since there would no longer be any loan to service. This is a thought many people have in mind which in my opinion is a HUGE MISTAKE!
Giving your children anything on a silver platter is a sure way to invite trouble. This is what normally happens to most rich kids who become spoilt as they have not worked hard and struggled to earn their “dues”. Once my mentor’s kids realize than they are going to be inheriting a huge amount, there is no longer any incentive for them to study hard and later work smart like what their parents did. Their desire or “hunger” for achievement and taking calculated risks is likely to be low. There is even a good possibility that they will squander away their parent’s hard earned wealth and leave nothing for their own children. Hence the popular saying:
The FIRST Generation EARNS
The SECOND Generation SPENDS
The THIRD Generation has to START all over again
I suggested an alternative plan to my mentor, one that I was planning for my own children. Instead of giving our children fully paid-up properties, why not give them properties whose loans have been “max-ed” out.
For example, once my children start turning 18 years old, I plan to refinance all my properties every few years by including their names into the restructured loans in order to maximize the loan tenors. All properties currently under our individual names will be eventually transferred into our family property holding company. The surplus money taken out will be for me and my wife to enjoy and/or give away. After all, that’s our hard as well as smart earned money.
What my children will be inheriting would be various properties worth RM30 million that comes with 75% financing or RM22 million in bank loans. This way, they will still receive a combined passive income of around RM10-15,000 per month. Divided by 3 kids, the amounts are small enough to ensure they remain “hungry” and not get spoilt. Also, they will have an incentive to get together regularly to manage the various properties as well as optimize the loans of RM22 million. Through such an arrangement, I hope they turn out to be smarter than other kids who inherit debt-free properties from their parents. It definitely makes more sense to do our kids a great favor by giving them Debt-FULL instead of Debt-FREE properties!
Another potential issue which I have not found a solution yet is the future in-laws problem. There is a saying: “Once the in-laws come, every one may become out-laws”. I am still thinking how to better this idea I have in mind and would be grateful for any suggestions. Finally, my strong suggestion is to consult lawyers who are experts in estate planning for the proper advice. There is no one solution to fit all problems.
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