The contrarian wealth dragon (Part 1)

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Wealth Dragons co-founder John Lee advocates wealth building through property investing and forex trading. In the first part of the three-part series, he shares with Personal Wealth his investing principles for property investing and motivation for setting up the company. 

 

WHEN it comes to amassing wealth, John Lee, 34, believes that investing in real estate and trading currencies will help get you there quickly. He himself became a millionaire at the age of 27 by investing in properties. 

The lessons he learnt along the way inspired him and his business partner, Vincent Wong, to set up Wealth Dragons, a UK-based wealth education and personal development training company, in 2009. The company focuses on property investments, foreign exchange (forex) trading, business start-ups, online marketing and public speaking.

“[Before forming Wealth Dragons,] my salary [as a computer animator] was about £36,000 (RM201,694) a year. But I wanted to have more time to travel, and I didn’t want to work for an employer [anymore]. 

“I reasoned that if I bought property and made my year’s salary very quickly, I could have the rest of the year off as a holiday,” Lee tells Personal Wealth in a Skype interview, in conjunction with the release of his book, The Wealth Dragon Way, published by John Wiley & Sons.

Lee prefers forex trading over other financial instruments, such as stocks or commodities, because he believes it delivers the fastest returns. “Your biggest asset is actually your time. You can’t buy back time,” he says. 

“Forex is good for wealth and asset building because it allows you to make money really fast. But you can lose money really fast as well. That’s why you have to learn before you can earn.”

Property investing

Lee’s foray into property investing began when he realised the appeal of having passive income instead of drawing a monthly salary as an employee. After quitting his job, he bought a house on the outskirts of London for £85,000 in 2005. Two months later, he sold it for £185,000, or a 118% profit.

“I made [the equivalent of] three years’ salary in a couple of months. The property was just outside of London. That was when it occurred to me that if it was this easy, why not do another one? I bought my second property for £200,000 and sold it for £250,000 after a few months.”

Lee continued to grow his portfolio. Within six months, he had already invested in 35 properties. Some of these he kept while others he flipped or converted into multiple-let properties (multiple-let, or multi-let, properties are units that are rented to more than one tenant). His strategy was to buy properties below their market value and make quick gains when he sold them. 

“Our rule [at Wealth Dragons] is that you make money when you buy, not when you sell. Every single property I buy is below market value. So, if I buy a property valued at RM1 million for RM800,000, I have already made RM200,000,” he says. “I don’t have to wait for the price to appreciate. I never buy at or above market value.”

While the average investor would consider 35 properties within a six-month time frame a high risk or an overleveraged portfolio, Lee doesn’t think so, as he is able to manage the risks involved. 

“I don’t think it was overleveraging. Every single one of my properties brought cash flow. You have to turn [property investing] into a system. I have staff to manage the properties for me,” he says, before elaborating on the risks and criteria he considers when venturing into property.

“For every property I have bought, there are only two risks. One is property prices, because what if you buy and it goes down in value? The other is, what if interest rates increase? Your mortgage payments will go up and your passive income decreases. But as long as you can manage these two risks, [35 properties] is not risky.

“There are two criteria [when deciding on a property purchase]: If I rent it, can I make a profit? If I can, then it is not overleveraging. Next, if I buy the property, can I sell it? All 35 properties I bought were in the UK and were 25% below market value.”

Today, his portfolio includes property in the UK, the Netherlands and Malaysia.

Lee initially funded his property investments by taking out mortgage loans and then refinancing them. However, he wasn’t able to continue doing so after the 2008 global financial crisis. He then started using alternative financing strategies, such as lease options and seller financing (see story on “Alternative property financing methods”). 

Lee advises against relying on banks for financing, as the growth of an investor’s property portfolio will be stunted if the banks decide to stop lending. 

“You can use seller financing, where the people who sell you the property also finance it. You can use lease options as an instrument, where you control the property without having to get a mortgage,” he says.

“Then you have investor financing. There are a lot of people out there who are equity rich but have no time and want a higher return on investment, so you can do a joint venture and work with that person.”

Having alternative financing methods is important to Lee, as one of his biggest mistakes as a property investor was relying solely on one funding strategy. “I bought a lot of properties in 2008, but I focused on one strategy. And when the market changed, my strategy became obsolete. I had to find another way to invest in property,” he says.

“My strategy was to buy property, hold it and rent it out for cash flow. But in the UK, where you get £300 for a month’s rent, your cash flow is wiped out if, let’s say, your boiler [for central heating] breaks. And the moment the banks stopped lending, my strategy became obsolete.”

Buying and hoping for the market price of a property to rise is one of the riskiest things an investor can do, says Lee. “Even though it served a lot of people well in Malaysia over the last three to four years, it is still speculation.”  

Hence, locating undervalued properties is an important part of his strategy. Lee avoids the conventional route of buying through real estate agents, developers or even at property auctions, calling them “the worst places you could go to” in search of property deals, as you are competing with every other buyer.

The ones he buys aren’t typically advertised, he says. “In the market, about 20% of sellers are in need of a quick sell because of personal circumstances. Maybe they want a divorce, want to emigrate, or are facing foreclosure. Their situation has left them with a short time frame to sell. So they come to us and we buy their property within 28 days. I buy it faster, but I also buy it cheaper.”

Lee gets the word out through various channels, from offline marketing and advertisements to social media, Google and referral marketing. It is important to market yourself in an effective way so that it attracts the right client, he says, adding that it is mostly sellers who approach him to dispose of their property.

The rental income from his properties began to provide him with enough cash flow. People also started seeking his advice on how to invest in property. He soon found himself spending more time mentoring others than focusing on his portfolio. This propelled him to start Wealth Dragons with his business partner, Wong, whom he had met at an investor networking event.

“We started Wealth Dragons by accident. We never set out to teach people, but I loved doing so because I didn’t want others to make the mistakes I made. The problem came because I spent so much time speaking with people instead of concentrating on my own [property] business,” Lee recalls.

“So, we decided to launch Wealth Dragons to teach people things they were never taught in school, such as how to buy property using leverage or lease options. I don’t have any qualifications in property. I am not an agent … my qualifications come from experience as I learn from trial and error.”

Lee estimates that around 20,000 people attend Wealth Dragons’ training events each year. In the near future, he hopes to build a property buying fund worth £500 million for his customers. 

“Once we raise that, we will go out and start buying properties under Wealth Dragons. We will launch that at the end of the year. We haven’t come to [the specifics of the fund,] but it will buy into asset-backed investments that are UK property specific, and it is going to be regulated by the Financial Conduct Authority (FCA),” he says, referring to the UK’s financial regulatory body.

“While high net worth investors will form the majority of the market, we won’t just target them as we want everyone to have the opportunity to get returns. We will give investors outside of the UK the opportunity to invest as well.”

Lee’s strategy of buying low and selling quickly may seem like a contrarian or even a high-risk move to the average investor who believes in property as a medium to long-term investment. But he says the strategies used depend on one’s circumstances or investment goals, as some investors look for higher returns or quick income, versus consistent returns, so that they can quit their jobs.

Ultimately though, property is a long-term game. “The great news is that property prices increase all the time, and typically double every 7 to 10 years. The market tends to move in a cycle, through booms, retraction, recession and recovery,” Lee says. 

“I always say Malaysia is a few years behind the UK. It has just gone through a boom period and now you have regulations [to cool the market], so what will eventually happen is that you will hit price-resistance [levels]. Malaysia is going through now what the UK went through in 2008.”

 

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 1 - 7, 2015.