Why This Property Renting vs Buying Comparison Is Wrong

Page 2 : Different Consequences, The Corrected Comparison

They Both Appreciate, With Different Consequences

Property values appreciate over time. Not just because of property speculation or increased demand, but also because of inflation. In 10 years’ time, the property may be worth anywhere from 34% more (inflation at 3%) to 3x more (due to high demand). The Damansara Perdana property example above saw an appreciation of slightly over 2x over 10 years.

The same inflation also reduces the “effective cost” of your monthly instalments, assuming your income keeps up with (if not exceed) the inflation rate. An inflation rate of 3% means the purchasing power of each ringgit drops by 3% per year. Because the loan instalment remains fixed (unless the interest rate changes), you would be paying 3% less in value every year, even while your property appreciates in value.

Inflation affects the rental rate too, to the detriment of the tenant. It is inevitable for landlords to ask for a raise in rental rates at the end of every tenancy. Usually tenancy agreements include a clause to limit the increase in rental to 5-15%. Assuming a very minimal increase of just 5% every 2 years, that works out to :

Years	Property Value = RM 320,000	Property Value = RM 403,000
1-2	RM 800	RM 1,000
3-4	RM 840	RM 1,050
5-6	RM 880	RM 1,100
7-8	RM 920	RM 1,160
9-10	RM 970	RM 1,220

But realistically, tenants should expect an increase of 10% every 2 years, particularly if they are living in an urban area :

Years	Property Value = RM 320,000	Property Value = RM 403,000
1-2	RM 800	RM 1,000
3-4	RM 880	RM 1,100
5-6	RM 970	RM 1,210
7-8	RM 1,070	RM 1,330
9-10	RM 1,180	RM 1,460
11-12	RM 1,300	RM 1,600
13-14	RM 1,430	RM 1,760
15-16	RM 1,570	RM 1,940
17-18	RM 1,730	RM 2,130
19-20	RM 1,900	RM 2,340
21-22	RM 2,090	RM 2,575
23-24	RM 2,300	RM 2,830
25-26	RM 2,530	RM 3,115
27-28	RM 2,780	RM 3,425
29-30	RM 3,060	RM 3,770

Inflation, therefore, is good for those who purchase their own homes, but bad for those renting them.

 

The Corrected Comparison

Assuming that this is a rural property, we corrected their instalment amount (for a 30-year loan) and adjusted for the average rental cost over 30 years. Here are the results :

A buyer will have to foot out RM 116,020 more (including stamp duties) in cash upfront, but pay RM 379 less per month, saving RM 136,440 over 30 years! More importantly, at the end of this 30-year period, the buyer owns the house, which should double in value to RM 640,000. The tenant will have nothing to his/her name.

But let’s adjust the rental to a more realistic RM 1,000 per month, based on the actual property value of RM 403,000, for an apple-to-apple comparison :

The results are startling. According to these more realistic numbers, the buyer pays RM 114,655 more (including stamp duties) in cash upfront, but ends up paying RM 834 less per month, saving RM 300,240 over 30 years!

In other words, buying the property will require a significant amount of cash upfront, but the buyer will be financially rewarded over time, saving anywhere from RM 136K to RM 300K in payment over 30 years. In addition, he/she will end up owning a house that will be worth at least RM 640,000.

The final score? Buyer will accrue RM 660,000 to RM 825,500 in savings and capital appreciation, while the tenant gains nothing in return.

Note : I just increased the buying cost to account for the stamp duty for the purchase and loan. They work out to be an extra RM 5,400 (S&P) + RM 1,440 (Loan) = RM 6,840. Thanks for pointing that out, Syafiq!

 

Does This Mean We Should Not Rent?

No. This does not mean everyone should buy a property as soon as they are able or willing.

A property is a long-term investment, one that is not easily liquidated (sold). Therefore, you should only purchase a house if you intend to live in it for a relatively long time – at least 5-10 years.

If you have an uncertain future and/or are not sure you will be living in the area for the next few years, it’s best not to purchase a house. Your job mobility may be hampered by your property purchase.

But if you intend to settle down, my advice would be to purchase your home, especially if you find a place you really like. Buying it will not only be an investment, it also secures your home – no one can evict you just because you refuse to an increase in rental!

It is a terrible shame that a property investment magazine like Property Insight Malaysia is doing such a bad job of advising Malaysians on the subject.

I hope this article will help to show you the BIG PICTURE over the long-term. Remember – property investment is long-term in nature.