Recently, I had received a question in the comment section of my article where I calculated how much is needed before you can afford a RM 500,000 property. The question is as follows:
Hi, my name is Jack. I’m considering a property unit measuring 700 sq. ft. which is strategically located, the building has a private bridge that connects residents to a large shopping mall and a MRT station. The price is RM 800,000 and if I am interested to buy it, all I need is to place a down payment of RM 6,000 only. As I write, I have a car loan and a student loan where the installment is RM 500 and RM 250 a month respectively. My question is: ‘Is it worth it and should I go with the property purchase?’
Here, I’ll list down 4 key considerations for you to decide if this is a good move:
What is the purpose for purchasing this property?
Is it intended to be your personal residence? Or, is it an investment property for you to earn rental income? Or, do you intend to flip it or hold onto the property for years to have capital appreciation for the long-term? Which of the following is a priority to you when purchasing this property?
So, if you intend it to be your home, who shall be residing together with you? Is it you alone? Or, would you be living together with your wife or future wife? Let us say, you and your wife (or wife-to-be) are fond with the property unit, I think both of you can make a unanimous decision about it.
If you plan to rent it out, who shall be your prospective tenants? How much are you planning to charge? Are these tenants willing to rent your unit at your price today and in the near future?
If you wish to sell it for a profit, how long do you plan to hold onto this unit? Do you think that your unit could be sold for a price higher than what you paid for in the future? What shall be your basis for your opinion?
If you find the above overwhelming, it is okay. It means that you have no clarity in your objective for buying a property. If so, I reckoned that you start by having this thought off first with some soul searching. There is no need for you to rush into it for you are making a major decision involving RM 800,000.
2. Price Per Square Foot (psf)
Price psf is a quick yardstick to measure the value of a property on a psf basis.
For instance, the price of the 700 sq. ft. property unit is RM 800,000. As such, if you take RM 800,000 and divide it with 700 sq. ft., the property unit is priced at RM 1,143 psf.
Then, you take this figure and compare it with other similar properties situated in the vicinity, both under construction and completed units. If your property is situated in a vicinity where prices for other similar properties are RM 1,500 psf today, then, your property is quite worth it. But, if prices are at RM 800-900 psf, then, the property would be overpriced and if so, you may want to consider the justification for purchasing this property unit, especially if you are investing.
3. Debt Service Ratio (DSR)
What would your DSR be after buying this property unit?
Okay, let me explain what DSR is. If you earn RM 5,000 per month and the debt installment you are paying is RM 1,000 per month, then, your DSR is 20%. Thus, it means that for every RM 10 you earn, RM 2 is spent on debt installments. So, from above, you have RM 750 a month in debt installments. You may take your monthly income and calculate your current DSR.
Here, let us say, Jack is a first time property buyer in Malaysia and he is eligible for a 90% Loan-to-Value (LTV) mortgage for this property. This means he would be applying for a mortgage amounting to RM 720,000. Depending on his tenure of loan, let us offer a ballpark figure for his monthly installment, where it would be around RM 3,200 based on a mortgage interest rate of 4% per annum.
So, if Jack is to go for it, his debt installment will increase to RM 3,950 a month. What will Jack’s DSR be after purchasing this property unit? If his DSR has risen to above 40%, I think Jack should consider if the monthly debt commitment is a bit too much to handle. This leads us to our next point:
4. How Long Could You Last?
If Jack pays RM 3,950 a month in total debt installments (car, student loan, and property) and another RM 500-RM 1,000 a month in maintenance fees, sinking fund, and other property related expenses, his commitment will balloon to RM 4,500-RM 5,000 a month.
The question is: ‘How much does Jack have in his bank account to pay for all his commitment if he loses his active income today?’
If Jack has RM 50,000, then, he may last for around 10 months. Is this enough? Or, would it be better to have more before taking the plunge in this property?
Property purchases are major decisions and it should not be taken lightly. Here, I believe Jack should reconsider his current financial standing and objectives for buying a property before getting into it. If he is not clear about his objectives or does not have the means to purchase a property, it is perfectly okay. Jack could take this opportunity to reflect what is important to him and concurrently build up his finances so that he will be both financially and mentally prepared to own a piece of property in the future.