I was invited to speak in Kuching as well as Miri last month and it was interesting to learn about the property market there. As I had been to Kuching a few years earlier, I made a frank comment to my audience that not much has changed in Kuching in terms of new buildings. In fact, I hardly saw any big office buildings, hotels or shopping centres under construction in both places.

This is in stark contrast to what has happened in Kuala Lumpur during the last few years. If someone last visited Kuala Lumpur three years ago, today he or she would hardly recognise the number of new buildings that has sprung up especially in the KLCC and Mt. Kiara areas.

Firstly, here is a bit of background information. Most of the participants from Kuching or Miri who attended the talk are staying in their own landed properties with the most popular being two storey link houses. Condo living has not and will probably never take off due to the abundant land supply. In both places, the average price of a two storey link house in a decent neighbourhood is around RM500,000. When I enquired what the rental rate would be like, I was not surprised to learn that it would be within the range of RM1,000 to RM1,400 per month. Also, the price appreciation of such properties in the last 10 years has been negligible when compared to the Klang Valley.

If you are living in Kuching or Miri or other similar places, would it make sense for you to be a homeowner, landlord or a tenant? Let us work out the numbers:

Scenario 1: Home Owner
Purchase Price = RM500,000
Down Payment = RM100,000 (20%)
80% Loan = RM400,000
Instalment at 5% pa for 25 years = RM2,400 per month*

As a homeowner, it will cost you RM2,400 per month in bank instalments. As a landlord, if you rent out your property at RM1,200 per month, you will have a negative cashflow of RM1,200 per month or RM14,400 per year. Your property needs to appreciate by this amount every year just to break even.

Scenario 2: Tenant
Instead of buying a RM500,000 landed property in Kuching or Miri, say a person decides to be a tenant there and invest in a condominium in the vibrant Klang Valley instead.

Purchase Price of Condominium = RM500,000
Down Payment = RM100,000 (20%)
80% Loan = RM400,000
Instalment at 5% pa for 25 years = RM2,400 per month*
Assuming Rental of Condominium = RM3,500 per month
Cash Surplus from condo = RM1,100/month
Rental to Pay Landlord in Kuching or Miri: RM1,200/month

<Place as a Footnote>
*Note: The formula in Microsoft Excel is “=PMT(0.05,25,-400000)/12”. The answer has been rounded up to the nearest 100

Hence there will be a slight negative cashflow of RM100 per month which is negligible in my opinion. You are essentially using the positive cashflow from your condo to pay for the rental for your double storey house.

From a financial point of view, Scenario 2 makes a lot more sense as there is a tendency for prices in the Klang Valley to appreciate faster than prices in the other parts of Malaysia. Hence it is better to invest in the Klang Valley and rent in other places.

When I challenged all the participants at my Kuching/Miri talks to sell off their homes, invest in the Klang Valley and become tenants instead, most of them will not be able to do it - at least not right away. The reason is because they are too emotionally attached to their homes having gone through a lot of trouble and money spent renovating it to their liking. Additionally, some have stayed in the same neighbourhood for many years while some harbour fears that their landlords may ask them to vacate overnight and more. They may consider doing so in the future if they needed to sell their current homes to upgrade to a bigger house.

Advice for beginners

Most men will be under pressure from their prospective in-laws to get their own home before settling down. Also, the first property most people purchase is usually their own home. Personally I feel that this is a big mistake most people unwittingly make.

Many times, your own home may not necessarily be the best place to purchase an investment property like in the case of Kuching and Miri highlighted earlier. You are far better off investing in a better location and instead rent a home in your chosen area.

Another common mistake some young newly married couples make is that their first property is a landed double storey house. Assuming they are both working and living on their own, they really do not need such a huge space yet. They might as well stay in a small apartment for a few years and later move to a landed property once they start a family.

In fact, I would even recommend renting for the first 10 to 15 years of your married life and invest elsewhere instead. As your children grow up and start schooling, the ideal home location for your family will change. When your children are toddlers, you may want a home nearer to your parents or baby-sitter. Later when they start schooling, it may be better to move to a place nearer to their school and such. Also, it is fairly common for people to switch jobs and companies during the first 10 years of their working life. Hence if you are renting, you will be more open to relocate yourself nearer to your place of work instead of spending long hours travelling to and fro.

Advice for people staying in expensive locations

For high-end residential properties, renting may be a cheaper option than buying. For example, double storey link houses in Bangsar are going for RM950,000 whereas the rental rates for unfurnished houses there are RM2,500 per month. If you wish to stay in Bangsar, will it make more sense to buy your own house or to rent?

In this case, it is actually cheaper to be a tenant instead of the owner. You might as well use the RM950,000 and invest in a commercial property somewhere else instead. Assuming a return of 7 per cent per annum, the rental from the commercial property will be around RM5,500 per month. After paying the RM2,500 per month to your landlord in Bangsar, you are still able to pocket an additional RM3,000 per month!

Advice for business people

I once had a participant who wanted to know where would be the best place to purchase a commercial property where they could use the ground floor for their jewellery business. They had a budget of RM3 million for this purpose.

I frankly warned them that they should not try to get the two purposes mixed-up. The ideal location for their jewellery business may not be the ideal location for a commercial property investment, and vice-versa. Furthermore, instead of purchasing, it is more advisable to rent for your own business use. In case the location does not turn out to be suitable for your business, you are free to move to a better one. Had you purchased your own unit, you will be much more reluctant to move out and that may ultimately affect your business in the long run.

If you have any comments on this article or questions, please email me at achievers88@yahoo.com. I would highly recommend that you sign up at our moderated getrichbook egroups at:

http://finance.groups.yahoo.com/group/getrichbook/

It is free for all my book readers and readers of this article. Only relevant emails pertaining to finance, property and stock investments will be approved for broadcast.

Article contributed by Milan Doshi
Independent financial trainer and bestselling author of “How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com. Copyright by Milan Doshi