Should I buy:
– a residential property which is under construction?
– or, a completed unit in the sub sale market?

Lately, I’ve noticed some booths set up to promote new property projects in shopping malls. Personally, I’ve visited a few of them to check out their latest offerings. As usual, I was greeted by a team of friendly agents. Then, I was given a thorough presentation by one of the representatives on the details and key highlights of the project.

The final part of the presentation is usually on its pricing details. As I write, it is common for developers to offer generous discounts, rebates, furnishing packages, and even free legal fees on the sales and purchasing agreement (SPA) and the loan document. As such, it is easier and less capital intensive to own a brand new property than one which is completed.

So, should I sign the dotted line?

Not yet. It is because I need first to weigh the pros and cons of investing in an under construction (UC) unit. Then, I would assess whether owning a UC unit is in alignment with my objectives for investing in a property. In this article, I’ll share five things to consider before investing in a UC unit.

#1: Am I Overpaying for a UC unit?

For a start, I would calculate the unit’s price on a per square foot basis. Then, compare it with prices of similar units within the vicinity.

The quickest way is to search for Project Reviews made available on PropertyGuru.com.my. I find that the information provided is quite comprehensive. Here, I’ll briefly illustrate how to use it to gauge the offer price of a UC unit quickly.

Link: Project Reviews

Step 1: Enter the Name of the Project
Let’s say I’m interested in checking out a project known as Emporis Serviced Residences in Kota Damansara. Upon entering its name, I’ll be directed to a page that provides a comprehensive review of the project. The information furnished is categorised into five segments. They include the introduction, project details, location, analysis and summary.

Step 2: Click Analysis
Upon clicking analysis, I’m able to check out two things. Firstly, the price for this project is published to be RM 750 per square foot. Secondly, the price for other developments within the vicinity is between RM 700 – RM 1,000 per square foot. In this case, I may conclude that the offer price for Emporis Serviced Residences is not overpriced.

PropertyGuru.com.my has already built a collection of project reviews. To check out other projects, you may click on the link below:

Link: New Property Launch

#2: Additional Interest Expenses

Let us say, I bought a UC unit today and is among its earliest buyers. It takes approximately three years to develop the entire project. Thus, I would expect to incur interest expenses over the next three years. The amount of interests payable is dependent on the completion stage of the project. As such, it is less probable to calculate precisely the amount of interest expenses to be incurred over the three-year period.

Still, it is an additional cost when compared to buying a completed unit in the sub sale market. If I buy a completed unit, I will not incur additional interest expenses as I would be servicing the mortgage immediately, and also getting rental income as soon as I can find a tenant. Thus, for a UC unit, I would subtract the additional interest expenses from the total value of the generous package of discounts, rebates and free legal fees to obtain the net amount of discounts offered to me as an interested buyer. For the more sophisticated investors who understand the time value of money, you can further discount the future capital outlay to the present value for direct comparison.

#3: Impact on Future Loan Eligibility

Can I afford to buy a piece of property?

It greatly depends on how much you can afford to borrow. In general, this amount is estimated based on your monthly income, age, and debt servicing ratio (DSR). For instance,

– You’re under 35 years old.
– You draw a monthly net income of RM 5,000 a month (after tax and EPF).
– Your existing DSR is 30%.

If the allowable DSR by a lender is 60%, the maximum mortgage payment that you can afford is the remaining 30% which is equivalent to RM 1,500 a month. Different banks may adopt different DSR levels depending on their lending and credit risk policies. In this case, the maximum loan amount that you can afford is around RM 315k.

Link: How Much Property Loan Can I Borrow?

If you borrowed RM 300,000 to buy a UC unit, you would start to service the full instalment of the loan upon the project’s completion. If it takes three years for the project to be developed, you could not borrow more money to buy another piece of property, assuming that you don’t get any income increment.

It is different from investing in a completed unit. Firstly, you would start to service the full instalment of the mortgage. Hence, the principal mortgage amount would start to reduce from the very first instalment. Secondly, you would receive income if you manage to secure a tenant. The rental income is recognised by banks as a source of revenue. Thus, it would boost your eligibility for additional loans in the immediate future.

#4: Am I Fighting for Tenants?

Let’s say I bought a UC condominium unit. Upon completion, I would receive keys to my brand new property alongside with hundreds of new unit owners for the project. If half of these owners are investors who intend to rent their units as soon as they received them, how fast and how much am I able to rent out my unit to a suitable tenant?

Potentially, there is competition among investors to secure potential tenants. Some may choose to rent at below market rate. Some investors choose to refurbish their units in an attempt to fetch higher rental income. Thus, before investing in a UC unit, I believe it is important to have a strategic plan in place once you’ve received your brand new property.

#5: Guaranteed Rental Returns

Today, some developers offer guaranteed rental return (GRR) schemes to boost property sales. Typically, a GRR scheme promises buyers fixed rental income for their properties over a given period of time. Some view it positively. Meanwhile, there are others who treat GRR schemes as scams. Personally, I believe both viewpoints are valid to some extent. Here, I’ll list down a few questions that I may ask before getting a UC unit with a GRR scheme.

– If there’s no GRR, would I still buy the property?
– Is the sales price of the property comparable to other similar properties located in the vicinity?
– Is the rental income guaranteed realistic and achievable in the present market condition?
– Is there a legal recourse for me in the event of a failure in the GRR scheme?
– Do I understand the terms and conditions stipulated in the plan of GRR?

These questions should be helpful to avoid getting into a property which is weak in demand and has the possibility of a failure in its GRR scheme.

Announcing the ‘My Dream Home’ Campaign …

Presently, PropertyGuru.com.my has launched the ‘My Dream Home’ Campaign. It is to assist you in buying the right piece of property by using the search functions, independent reviews, market outlooks, guides and some user-friendly tools by PropertyGuru.com.my.

This campaign allows you to win up to RM 50,000 in prize money from PropertyGuru.com.my to finance your purchase of a brand new property. The contest period is for a limited time only and would end on October 31, 2017. For more information: My Dream Home

Good Luck.


KCLau
KCLau

Personal finance author and trainer

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