Page 1 : Why Property Insight Malaysia Is Wrong
Contents
A few days ago, Property Insight Malaysia, a monthly property investment magazine, posted this comparison on renting vs buying a property on their Facebook page.
They claim that renting a RM 320,000 property (instead of buying it) will save you RM 112,570 in upfront costs, and RM 823 in monthly expenditure. Take a look :
Shocking, isn’t it? With figures like that, who in the right mind would buy a property?
What’s really shocking though is the fact that a property investment magazine would come up with such a terribly inaccurate and misleading comparison.
Let’s break down their comparison and show you why it is literally “bullshit”.
It’s Not Apple To Apple
Let’s start with the fact that the two properties are not of equal value.
The “Buying” example adds repairs and painting, renovation and furniture costs, while the “Renting” example assumes that all of those are already part of the RM 320,000 cost of the house. In other words, they compared a RM 403,000 house with a RM 320,000 house – a RM 83,000 / 26% difference in value.
Painting and renovation may be necessary for purchasers of new or old houses, but they are not just “costs”. They add value to the house – the property appreciates because of these improvements.
More importantly, a landlord who’s spends the same amount of money renovating and furnishing his RM 320,000 house is not going to rent it at just RM 800. He/she would probably rent it out for RM 1,000-1,200.
Where Can You Find Such Prices???
Many Malaysians are wondering – where in Malaysia can you still find a house or apartment for sale at just RM 320,000, or for rent at just RM 800?
Not in any major metropolitan areas, that’s for sure. You can only find such places in the suburbs.
We are going out on a limb and assume that since Property Insight Malaysia is a property investment magazine, they are not talking about low-cost housing but lower middle-class housing.
I recently assisted a relative in purchasing a 10-year old leasehold apartment measuring just under 1,000 sf for RM 525,000 in Damansara Perdana. That’s the kind of price city-dwellers are looking at realistically, and it’s 64% higher than their example.
Residents in the same apartment are also paying a lot more for rental. A smaller 850 sf unit can fetch RM 1,700 in rental. That’s more than twice what they used as their example.
The low purchase price of RM 320,000 and the much lower rental price of RM 800 are only possible in the suburbs or rural areas. Keep that in mind when you view that comparison.
Is RM 800 A Realistic Rental Rate?
It depends on whether the house or apartment is valued at RM 320,000 (as claimed) or RM 403,000 (in reality).
The ROI (return on investment) if the property is worth RM 320,000 including renovation and furnishing is 3%. This is considered very low since it’s below the FD (fixed deposit) rate. Generally, investors want a ROI of at least 5%-8%.
The ROI of 3% is also a tad below the inflation rate, which means the landlord ends up losing money. Still, it is acceptable in the suburbs or when the rental market is “soft“. It allows the landlord to keep up with the instalments while waiting for the property to appreciate in value.
On the other hand, RM 800 is an unrealistic rental rate for the RM 403,000 property (including renovation and furnishing) that they actually used in the comparison. That’s an ROI of just 2.38% – far below even the lowest FD and inflation rates. No landlord would stoop so low, unless he/she is really desperate.
Even if we peg the ROI of their RM 403,000 property to the low rate of 3%, that would mean a rental of at least RM 1,008 per month, not RM 800. In other words, they are “off” in their estimated rental rate by RM 208 or 26%.
The Instalment Seems A Bit High
You would be correct. The current effective rate for housing loans (without zero moving costs) range from 4.39%-4.67% per annum. Let’s take an average of 4.55%. With a loan margin of 90% and a tenure of 30 years, that works out to a monthly instalment of RM 1,467.82.
The difference is small at RM 72.18 per month, but very significant. If you actually pay RM 1540 instead of RM 1467.82 per month, you will shave off 34 months of instalments, saving you about RM 51,494.32 in interest!
Based on my calculations, it appears that Property Insight Malaysia used a much higher interest rate of 4.96% per annum in their comparison.
You Don’t Own What You Rent
Technically, you don’t own the house you purchase until you finish paying your housing loan either, but the fact remains – it eventually becomes your property, your asset.
A rented property, on the other hand, will never be your asset no matter how long or how much you pay.
Next Page > 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.