Question:

‘Hi, I’m Adam. I’m 33 years old this year and currently working as a Branding & Marketing Consultant for a local company. I’m earning a decent monthly salary  of RM 7,000, had saved up approximately RM 100,000 in my bank account and have no outstanding debt apart from a RM 50,000 car loan where I’m servicing a monthly instalment of RM 1,000.

I’m now living in a nice double-story house in Subang Jaya where I’m renting it for RM 1,300 a month. This year, I intend to buy my first property. My question is: ‘Should I buy:

  1. A Personal Residence Costing RM 600,000 and move into it?
  2. 2 Investment Properties Costing RM 300,000 each and continue on my stay in the double-story house with RM 1,300 in monthly rent?

 

Answer:

First, it is important for us to acknowledge the answer to the above question is not as simple and straightforward. It is dependent greatly on one’s intention of purchasing a piece of property which involves multiple considerations in terms of his life objectives, financial plans, goals, preferences.. and so on and so forth.

Thus, if you are Adam, the first thing to do is to understand yourself better and what you intend to accomplish from buying a property.

But, what if you are undecided?

Here, I’ll discuss the above matter based solely on financial smarts. This means, I’ll exclude considerations such as location, size, land titles, … which are unique attributes of a piece of property in my attempt to answer the question above. It is my sole intention to share possibilities to Adam’s financial wellbeing from the two choices above.

Hence, here are 5 key considerations to help you decide whether you should be buying a nice personal residence or split its cost into 2 investment properties.

 

Consideration #1:

Is Adam able to Buy Properties costing RM 600,000?

 

Let us start by estimating Adam’s maximum loan eligibility amount (MLEA) that he could qualify presently for a mortgage:

 

Adam’s Maximum Mortgage Installments (MMI)

= (Monthly Salary x Debt-Service Ratio (DSR)) – Monthly Debt Instalments  

= (RM 7,000 x (let’s assume it is 60%)) – RM 1,000 (Car Loan Instalments)

= RM 4,200 – RM 1,000

= RM 3,200

 

Adam’s MLEA:

= Adam’s MMI x the Rule of 200

= RM 3,200 x 200

= RM 640,000

 

Adam is able to obtain 90% financing to purchase his first two properties. Thus, he is eligible to consider the purchase of 1 or 2 properties priced RM 600,000 in total as his total loan amount (regardless of his choice) is RM 540,000. I believe, Adam is able to finance the 10% downpayment and its associated costs (around 3% – 5%) for the property as he has saved up RM 100,000.

So, ‘Yes, Adam can afford to buy these properties.’

 

Consideration #2:

If Adam Buys a Personal Residence costing RM 600,000 …

 

If Adam buys his personal residence, his monthly cash outflow for a roof under his head will increase from RM 1,300 a month to RM 2,600 a month as that will be the amount of mortgage instalments he would service per month.

For the first 10 years of Adam’s instalments, 75% of them are interest payments to his bank. The remaining 25% will be Adam’s repayments to his loan principal.

Therefore, it is estimated that Adam’s:  

 

Loan Principal Repayments = RM 650 / month (Forced Savings)

Interests Payable to the Bank = RM 1,950 / month (Bank’s Income)

 

Adam would not generate income from his personal residence. The RM 650 per month is treated as a forced savings as he would have accessed to the money if he sells his property in 10 years. But, as for the remaining RM 1,950 per month, it is definitely an expense to Adam as it is an income to his bank.

 

Consideration #3:

If Adam Buys 2 Investment Properties costing RM 300,000 each …

 

It is common to earn rental income of 4% – 5% from letting out properties that are now worth RM 300,000. Let us assume, Adam is able to rent his properties at RM 1,200 a month for each property, hence, earning himself a decent rental income of RM 2,400 a month.

 

Adam’s Gross Rental Yield per Property

= (Monthly Rental Income x 12 months) / Property Price x 100%

= (RM 1,200 x 12 months) / RM 300,000 x 100%

= RM 14,400 / RM 300,000 x 100%

= 4.8% (It is within range of 4% – 5%)

 

Adam would be downed by RM 200 a month as his rental income of RM 2,400 a month is lesser than his mortgage of RM 2,600 a month.

But, Adam’s interest costs are fully paid by his tenants. The RM 200 a month in extra payments are used to repay his loan principal, which is treated as his own ‘forced savings’.

If Adam buys himself two investment properties, his monthly cash outflows will increase from RM 1,300 a month to RM 1,500 a month. Hence, Adam would be ‘freer’ financially as it is significantly lesser than RM 2,600 per month if he opts to buy himself a personal residence costing RM 600,000.

 

Adam’s Monthly Cash Outflow

= (Mortgage – Rental Income) + Monthly Rent (Subang Jaya)

= (RM 2,600 – RM 2,400) + RM 1,300

= RM 1,500

 

Consideration #4:

Impact to Adam’s Loan Eligibility after Purchasing …

 

If Adam chooses to buy a personal residence at RM 600,000, Adam’s maximum loan eligibility amount (MLEA) that he may qualify for a mortgage in the future:



Adam’s Maximum Mortgage Installments (MMI)

= (Monthly Salary x Debt-Service Ratio (DSR)) – Monthly Debt Instalments  

= (RM 7,000 x 60%) – RM 1,000 (Car Loan) – RM 2,600 (Mortgage)

= RM 4,200 – RM 1,000 – RM 2,600

= RM 600

 

Adam’s MLEA:

= Adam’s MMI x the Rule of 200

= RM 600 x 200

= RM 120,000

 

In other words, if Adam does not increase his income in the future, it would be difficult for him to buy his next property unless… he wants to buy a flat located away from the Klang Valley.

Instead, if Adam buys 2 investment properties as discussed above, Adam’s MMI and MLEA would be:

 


Adam’s MMI

= ((Monthly Salary + Rental Income) x DSR) – Monthly Debt Instalments

= ((RM 7,000 + RM 2,400) x 60%) – RM 1,000 (Car Loan) – RM 2,600 (Mortgage)

= (RM 9,400 x 60%) – RM 1,000 (Car Loan) – RM 2,600 (Mortgage)

= RM 5,640 – RM 1,000 – RM 2,600

= RM 2,040

 

Adam’s MLEA:

= Adam’s MMI x the Rule of 200

= RM 2,040 x 200

= RM 408,000

 

Therefore, in terms of loan eligibility, Adam is able to obtain another mortgage up to RM 400,000 where it can be used to buy more properties in the future.

 

Consideration #5:

What about Capital Appreciation?

 

In general, it is popular belief that real estate would appreciate in prices for the long-term. That is why we (at KCLau.com) encourage all to be property owners. The question is: ‘Are there any differences between buying a property at:

 

  1. RM 600,000 and hoping it to rise to RM 1,200,000 in 10 years?
  2. RM 300,000 and hoping it to rise to RM 600,000 in 10 years?

 

My answer is a Yes. This is because, I believe, property prices are influenced by a handful of key factors such as the level of income earned by the residents in a neighbourhood, their level of affordability, and how fast would income increase in the future. Remember: Malaysia is still not yet a high-income nation and, as I write, we are still talking about affordable housing for the masses.

Let us fast forward 10 years into 2029. Question: ‘Assuming that property prices did doubled up in 10 years from today, is it easier to find buyers for:

 

  1. A Property costing RM 1,200,000?
  2. A Property costing RM 600,000?

 

Once again, there is no absolute right or wrong answers to the question above.

But, if I am to pick, I believe, there will more Malaysians who can afford to buy a property costing RM 600,000 over one which is priced at RM 1,200,000, thus, my bet is on the RM 600,000 property.

As such, I believe, the added advantages for Adam to buy a piece of property at RM 300,000 over RM 600,000 are:

 

  1. It is easier to dispose because, if it rises to RM 600,000, the property is more affordable than one that doubles from RM 600,000 to as much as RM 1,200,000.

  2. If Adam buys two RM 300,000 properties than a RM 600,000 property, Adam is flexible to dispose one of the two properties if he happens to be in need of cash in the future.

  3. If Adam is new to properties, he may treat this as a learning experience to be familiar with the entire process of buying a property. For Adam, it can be less stressful, less capital intensive and more forgiving especially if Adam bought himself a ‘wrong’ property.

 

Conclusion:  

Here, I’ll summarize the 5 key considerations plus a bonus the table as follows:

 

Considerations

Personal Residence

2 Investment Properties

Monthly Cash Outflows

RM 2,600

RM 1,500

Loan Eligibility Impact

RM 120,000

RM 408,000

Price Stability

Less Stable

More Stable

Financial Flexibility

Less Flexible

More Flexible

If Buy a Wrong Property

Less Forgiving

More Forgiving


90% Loan Quota

Retains 1 More Property

where LTV is 90%

No More. Next Residential

Property at 70% LTV

 

So, if you are Adam, which of the two choices would you opt for? Please leave your comments below:

 

 


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.

Leave a Reply

Your email address will not be published.