The choice between buying a home and renting is one of the biggest financial decisions many Gen-Ys make. The costs involved are varied and could be complicated especially with Malaysia’s current economic climate.
To help answer the question and glean some advice on property financing, REENA KAUR BHATT had a chat with Chris and Andy Gan, property investors and co-owners of TWINS Education.
BUYING – LIVING THE ‘MALAYSIAN’ DREAM
Buying a property enables you to:
Hedge against inflation – If one does not invest in appreciating assets, his or her purchasing power or wealth will diminish over time due to inflation. Conversely, inflation would work in your favour when you own a property as you do not have to worry about the landlord jacking up your rent each year. Your monthly instalments are essentially locked in for as long as you live there.
Grow your equity over time – Equity here will mean the bank value of the property after netting out your outstanding mortgage. As the value of your home goes up and your mortgage principal goes down, that is money in your pocket down the road. With your equity rising every year, you have the option to refinance your property and gain additional capital which can be used for your children’s education or another investment venture.
Ensure stability – You will have a home of your own and gain a feeling of belonging as well as a sense of community as you plant roots and create strong ties with your family, friends and neighbours. In addition, you eliminate the risk of your landlord chasing you out before your tenancy period is due.
Earn passive income – There are quite a few youngsters who have a property of their own but do not have any plans for a family, opting instead to lease out the additional rooms for rental income – either to friends, colleagues or even on Airbnb.
On the flip side,
It is not easy to obtain financing from banks – banks are being more selective in picking their clients. With the nation’s household debt standing at 89.9% of the gross domestic product, banks will not be loosening their strict lending guidelines anytime soon.
There is credit risk – Taking a mortgage exposes you to the risk of not being able to pay your debts. Not only that, you also expose yourself to the risk of rising interest rate some may find it stressful to meet the instalment payments at the end of each month, especially if they are dealt with an unfortunate circumstance such as losing their job.
Thus, you must be confident of your repayment capabilities prior to purchasing. The twins recommend potential buyers to maintain financial prudence by incorporating an interest rate of 8% in their budget calculations instead of the current approximate rate of 4.8%. This serves as a buffer in the event of interest rate hikes in the future.
WHY RENTING MAKES SENSE TOO
Renting gives you the flexibility to move around to different locations according to your career and lifestyle direction. Most importantly, many properties sold under the Developer Interest Bearing Scheme (DIBS) will be seeing completion either this year or in 2017. This means that not only will there be an ample supply of rental units available in different locations, rental prices will be lower too due to increased competition among investors.
This option is also more feasible for most young working adults who are not confident of their repayment capabilities. Many do not even have enough cash for the initial cost of purchase, i.e down payment, stamp duty, legal fees, fire and/or mortgage insurance, what more the required funds for miscellaneous expenses (quit rent and maintenance fees) and an emergency fund. Providing their colleague’s experience as an example, the twins shared how he leveraged on renting.
A few years back, their friend was looking to purchase a RM3 million bungalow in USJ Heights where the monthly instalment payment amounted to RM15,000 for a 30- year tenure. He opted to rent instead at RM7,000 per month. This move kept his Debt to service ratio (DSR) at a minimum rate and the 53% savings (RM8,000) was used to then invest in his very own piece of rental property.
BUY TO RENT FIRST AND NOT FOR OWN STAY
Purchasing a rental property instead of one for own stay makes more sense financially. The combined profits from your rental income and savings from your own rental payments will enable you to obtain your very own nest egg. In addition, by receiving and declaring rental income for income tax purposes, you are able to leverage themselves further for more property investments.
Of course, you have to make sure to purchase a property that guarantees a positive cash flow each month. In other words, let your tenant pay your ‘monthly commitments’ for you and use the extra ‘income’ to get another rental property or a place of your own.
IN A NUTSHELL
At the end of the day, one’s decision to buy or rent depends largely on one’s priorities, risk appetite, and the type of product (property) he/she is planning to invest in.