Should I invest in:

  1. A nice condominium unit worth RM 700,000?
  2. Two medium-cost apartment units worth RM 350,000 each?

 

Before I share my insights, please allow me to share how you could estimate the maximum amount of mortgage that you are eligible to borrow. You need the following: 

  1. Your Age.

    • Your age decides the tenure of your mortgage.
    • If you are below the age of 35, your tenure is 35 years.
    • If you are above 35 years old, then, your tenure works out to be 70 minus your current age.
  2. Your Monthly Net Income after income tax, EPF & SOCSO
  3. Interest Rate.
  4. Your Existing Monthly Debt Repayments such as mortgage, car loan, credit card debt, personal loan, PTPTN … etc.
  5. Mortgage Affordability Calculator.
    You may use the free calculator at iProperty.com.my –
    Link.

 

From the free calculator, an investor can afford to invest RM 700,000 worth of properties if he:

  1. Is below 40 Years Old.
  2. Has Minimum Cash Reserves of RM 100,000.
  3. Has Net Income of RM 5,000 per month.
  4. Able to Qualify for Debt-Servicing Ratio (DSR) of 70%.
  5. Has no outstanding liabilities like car loan, mortgages, personal loan, credit card debt,… etc. If the investor has existing debt obligations, he needs to earn more than RM 5,000 per month in net income or has a cash reserves of more than RM 100,000 to buy or invest in properties worth RM 700,000.

 

Now, let us assume that you are qualified. Back to the question above, should I invest in a nice condominium unit worth RM 700,000 or invest in two units of medium-cost apartments worth RM 350,000 each?

First, I believe, there is no absolute right or wrong answers to this question. I think your decision should be based on your personal objective for investing in properties. It is helpful to have an investment plan crafted out beforehand.

However, if you are still contemplating on the two options above, then, allow me to give you a hand. Here, I’ll list down 7 key considerations that would be helpful to make a better choice between the two:

Note:

The calculations below are based on:

  1. Loan Tenure: 30 Years
  2. Interest Rate: 4.5%
  3. Down Payment: 10% of Property Value

 

#1: Rental Income

  Plan

A

B

  Price

RM 700,000 x 1

RM 350,000 x 2

  Expected Yield

4.5%

4.5%

  Monthly Rental

RM 2,625 / month

RM 1,313 / month

 

If you intend to earn 4.5% in rental yield,

  1. Plan A
    You may price the rental for your condo unit at RM 2,600 per month. The questions you need to ask are, ‘Who are your potential tenants & are they willing to pay RM 2,600 a month in rent and why?’
  2. Plan B
    You may price the rental of each apartment unit at about RM 1,300 a month. Thus, you could aim for tenants who are earning much lesser. It may be an advantage to you as a landlord as there are more tenants in the B40 & the M40 income group as opposed to ones in the T20s. After all, Malaysia is still not exactly a nation filled with rich people. Tenant’s affordability is an issue for tenants when considering a unit to rent and thus, affecting your investment returns as a landlord.

 

#2: Renovation Costs

Let’s assume, both units in Plan A & Plan B, are bare and you intend to rent out your units fully-furnished. How much should you budget to renovate or refurbish your unit? It depends on the potential tenants that you are trying to attract. For example,

  1. Plan A
    If you are attracting tenants who will pay RM 2,600 a month in rent, what kind of furnishing do you need to provide to attract them? You may need to spend more on make your unit stand out as you need to impress your potential tenants who have greater earning power. You may, of course, stinge on renovation. However, you may also putting yourself at risk of losing a potential tenant.
  2. Plan B
    However, if you are going for tenants who are earning lesser, usually, you would spend much lesser as overpaying for renovation does not makes sense if it does not bring in substantial increase in rental and return on investment to you as a landlord.

 

#3: The Mortgage

  Plan

A

B

  Price

RM 700,000 x 1

RM 350,000 x 2

  Mortgage

RM 3,154

RM 1,577 x 2


Is there a difference between the two?

In terms of numbers, not much. But, I think, their difference lies in terms of the risk of losing a tenant.

 

  1. Plan A
    Supposedly, you have a tenant that pays a monthly rent of RM 2,600 for your unit. If he moves out, the questions are: ‘How quick are you able to secure a new tenant that is willing to pay RM 2,600 a month?’ This is because, if you fail to do so, you may incur the full mortgage payment of RM 3,154 for the months when your property is vacant.

  2. Plan B
    However, let us assume that you have two tenants that pay RM 1,300 a month each for your units. If one of the two decides to leave, you’ll still receive RM 1,300 a month from the other tenant while you try to find another tenant for the vacant unit. As such, the impact of losing a tenant to your finances is not as severe as the one in Plan A.

 

#4: Initial Entry Fees

  Plan

A

B

  Price

RM 700,000 x 1

RM 350,000 x 2

  Down Payment (10%)

RM 70,000

RM 35,000 x 2

  Entry Fees

RM 29,810

RM 13,880 x 2

  Total Initial Capital

RM 99,810

RM 97,760

 

The entry fees, comprising of SPA legal fees, SPA stamp duty, Loan legal fees, Loan stamp duty and valuation fees, are different from Plan A and Plan B. Its amount can be easily estimated with the free calculator at iProperty.com.my.

The key difference maker between the two is the SPA stamp duty for Plan A is more expensive than Plan B, thus, causing its entry fees to be higher.

 

#5: Loan to Value (LTV) on Next Property

  Plan

A

B

  Price

RM 700,000 x 1

RM 350,000 x 2

  LTV on Next Property

90%

70%

 

According to Bank Negara Malaysia, a borrower would only be eligible for as much as 70% financing for the purchase of his residential property. Hence, if you want to buy another property with 90% financing in the near future, you are still eligible if you opt for Plan A (if it’s your 1st property), not Plan B.

 

#6: Future Potential Buyer of Your Properties

  Plan

A

B

  Original Price

RM 700,000 x 1

RM 350,000 x 2

  Appreciate to:

RM 800,000 x 1

RM 400,000 x 2

  Potential Buyer’s

  10% Down Payment

  for one unit

RM 80,000

RM 40,000

 

Supposedly, your portfolio, Plan A & Plan B, had appreciated by RM 100,000 after years of holding onto them. You decide to sell your property to reap the investment rewards that you truly deserve. If you opt for:

 

  1. Plan A
    Your potential buyer needs to prepare a minimum of RM 120,000 in cash reserves to buy your unit. The RM 120,000 is inclusive of down payment of RM 80,000 and several initial entry fees stated in Point 3. As mentioned, Malaysia is still not a nation with rich people. Thus, it may take more time for you to secure yourself a buyer.
  2. Plan B
    Your potential buyer needs to prepare RM 60,000 in cash reserves to buy your unit. Perhaps, you may find yourself a buyer quicker as the unit is substantially lower in price. In addition, you have an option of selling only one unit and keeping the other unit to yourself, which is not available to investors who opt for Plan A.

 

#7: Future Selling Price of Your Properties

  Plan

A

B

  Original Price

RM 700,000 x 1

RM 350,000 x 2

  Appreciate to:

RM 800,000 x 1

RM 400,000 x 2

 

Here, I’ll focus on the potential selling price of your units: Plan A and Plan B, especially in a buyers’ market when there is a slowdown in the local property market. Generally, properties that are higher-priced would have higher levels of price disparities as compared to lower-priced properties. For example,

 

  1. Plan A
    A similar unit to yours could be asking for RM 700,000 – RM 750,000 in a depressed market. It depends on how ‘desperate’ owners of other similar units to yours are in selling off their properties. The degree of desperation is subjected to the owners’ ability to pay their mortgages. In this case, the mortgage for a nice condominium unit is RM 3,154 a month. Thus, if a portion of these owners cannot afford to bleed cash over the long run, they might become desperate sellers and would be willing to sell their units at lower prices, thus, affecting the potential selling price of your unit.
  2. Plan B
    A similar unit to yours could be asking for RM 370,000 – RM 385,000 in a depressed market. Chances are, the level of desperation from the owners of similar units to yours are much lower compared to Plan A. This is because, for one medium cost apartment unit, the mortgage is much lower. In this case, it is RM 1,577 a month. It is more likely that owners would continue to service their mortgages while waiting for a recovery in the property market. As such, prices of properties that are lower-priced are more stable than ones which are higher-priced.

 

Conclusion

So, is it Plan A or Plan B for me?

Well, it depends on your financial standings, investment objectives and your risk profile. For instance, if you are conservative and do not wish to have too much debt on a single property, then, you may opt for Plan B where you can spread your investment to two medium-cost apartment units. Otherwise, you may opt for Plan A where your financial commitment is heavier on one piece of property.

Are there more than the 7 considerations mentioned above? If so, please leave a comment below. Thanks.


Ian Tai
Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.

    1 Response to "If I Can Invest in Properties worth RM 700,000 …"

    • Dom

      Great analysis. I believe we need to factor in the maintenance cost + sinking fund for the apartment. The monthly cost per square feet between Plan A (1 x condominium) and Plan B (2 x medium cost apartment) should be compared.

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