When I was in my 20s, I was new to self-employment.
My income was low and I did not have much savings either. I had nights where I doubted my future. But also, I had nights where I believed that I could, one day, have the means to invest in properties. Those were the times, when the level of my optimism and pessimism swung back and forth like a pendulum.
Despite the emotional tussle, I pressed on each day.
Fast forward today, I own two tenanted properties in my portfolio. They are not enough to bring me up to ‘Property Guru’ status. But nevertheless, I believe the progress thus far is something valuable that could be shared to you, particularly if you are a fresh graduate and are aiming to buy your first property today.
So, the question is, ‘What can I do today if I have just landed myself a first job?’. Well, if I’m back in my 20s, here are 4 things that I would do:
#1: Get a Few Credit Cards
Yes, I would apply for 2-3 credit cards from different banks. But, these cards are not meant for indulgence. Instead, they would be used to build up my profile as a creditor, which is helpful in future mortgage applications. The reason why this is helpful is because the banks could track our debt repayment behaviours prior to deciding on our loan applications.
With that, here are a few best practises after receiving your credit cards:
1. Pay all credit card bills on-time.
2. Limit spending up to 30% of your credit limit at all times.
3. Do not reveal your credit card number and its pin number unnecessarily.
4. Check your credit card transactions frequently.
5. Call your banker immediately if you find any unauthorised card transaction.
If you practise the above, you should have a healthy CCRIS and CTOS report and they would be helpful in your future mortgage applications.
#2: Refrain from Purchasing a Car
This is related to our debt-service ratio (DSR).
For instance, you earn a salary of RM 2,500 a month. Then, you buy a car which would cost you a car loan instalment of RM 500 a month. Hence, this works out to be a DSR of 20% as your car loan instalment is 20% of your monthly salary. In best financial practises, I believe one should limit his DSR to 30%-40%. Hence, if you spend a big chunk of DSR on a brand new car, you are actually limiting your options when purchasing properties in the future.
So, if you wish to invest in properties, you should take note of your present DSR and make reservations for your future property purchases.
But, what is the price range of a property that I can afford?
Let me give you a comparison.
Supposedly, we have Tan and Chong. They make RM 5,000 a month. At present, Tan is servicing a car loan instalment of RM 1,000 a month. Whereas, Chong, on the other hand, is debt-free. Let’s assume that local banks adopt credit policies, which limit their lending up to 60% of an individual’s monthly income.
Thus, we would have the following:
We can see that Chong is eligible for RM 200,000 more mortgages than Tan. So, Chong could afford to buy a property that is higher priced than Tan. As such, we can see the importance of DSR and its impact towards property purchases.
Hence, it is best to consider the impact of your DSR before purchasing a car.
#3: Invest in Upskilling
Today, the biggest issue in buying a property lies in one’s ability to place a down payment of 10% for the property. This means, if you intend to buy a property at a price of RM 500,000, you would need a down payment of RM 50,000 to make the property purchase.
But practically speaking, to really afford such a property, it is best to have about RM 100,000 in excess cash. This is because in addition to its down payment, we would be required to pay for its transaction costs and have some cash prepared to service its mortgage instalments.
Of course, if I’m now earning anywhere less than RM 5,000 a month, naturally, I would feel that having RM 100,000 in savings seems to be a million miles away.
So, what can we do?
Well, when I was in my 20s, I tried to save as much as I could. Thus, it took me a few years before I raised the down payment for my first property. I bought it for a price around RM 300,000 as I intended to ‘test water’ with it.
But today, if I’m making RM 3,000, RM 4,000 or RM 5,000 a month, what would be the amount that I could save a month? If I cannot save RM 2,000 a month as of now, I would say that the property purchase would be out of reach presently. Thus, while I believe saving cash is helpful, this alone might not be sufficient for us to raise funds to keep on buying properties in the Klang Valley.
The focus should not be on saving money, but on raising income.
And the key to raise income is to find ways to upskill in your vocation.
In addition, if it is practical in your vocation, try to tie your performance directly to your income. This is so that your income is linked to the amount of value you bring into your clients, your customers, and your corporations.
#4: Be Cautious of ‘No-Money-Down’ Deals
As I write, there are ads that promote no-money-down or cashback deals in this country. Many have bought hugely overvalued properties like this and are stuck with them today. They are finding it difficult to sell them off or rent them out at good rates presently. So, it was easy for them to go in but difficult to get out.
Typically, no-money-down or cashback deals tend to attract people who believe in fairy tales and they may not understand property valuation. This is why these people tend to lose 5-6 figures in their property purchases.
In Malaysia, if you are a local first-time home buyer, you would need to place as much as 10% down payment for a residential property. If today, you want to get more choices on property deals, I believe it would be better to play by the book and prepare the 10% down payment. Yes, it can be ‘slower’, but what is slow as compared to potentially losing 5-6 figures over years due to chasing these deals that are overpriced.
Like all investments, it is best not to be blinded by greed.
You still can win the property game steadily.
Conclusion:
Looking back, I’ve come a long way when it comes to real estate investing. I had learnt quite a fair deal and received guidance along the way. Here, I hope that a little sharing that I have made in this write-up would be helpful to you as you’re journeying along towards your first or next property. Once again, here are the 4 things that I would do to buy a property if I’m in my 20s today:
1. Get 2-3 credit cards to build my credit profile.
2. Don’t buy a car. Reserve my DSR for property investments.
3. Upskilling to raise income.
4. Be Cautious of No-Money-Down or Cashback deals.
