Should I invest in:
- An existing condominium unit from the sub sale market?
- An under-construction condominium unit from a developer?
It is a simple question. But, the answer is not as straightforward. There are lots to consider. It ranges from one’s financial status, to his objectives for investing in real estate, to his level of risk tolerance and expectations of returns from his investment. The focus, I believe, is not a matter of finding out which of the two is better, but rather, a question of suitability.
If you are new to property investing, you may not have a complete perspective on their differences and hence, could not decide between the two. No worries. In this article, I’ll share 8 key considerations that you need to know before you decide which of the two best suits your investment needs.
#1: 10% Down Payment
First, let me set the record straight. If this is your first time buying a residential property, be it a completed unit or an under-construction unit, you would first need to fork out a down payment amounting to 10% of your purchase price of the property. So, if a condominium unit is priced at RM 400,000, thus, you pay a down payment of RM 40,000.
Here is a key difference. As I write, the local property market is still depressed. Thus, to boost sales, local developers today are offering discounts and rebates for their under-construction units. The discounts offered would vary from one developer to the next, depending on the level of their generosity. Generally, it ranges between 3% – 8% of the purchase price of your property, thus, allowing you to fork out lesser in down payment. For example, if a condominium unit is priced at RM 400,000 and the discount offered is 5%,
Your Down Payment
= 10% of Your Purchase Price – Discounts Offered by Developer
= (RM 400,000 x 10%) – (RM 400,000 x 5%)
= RM 40,000 – RM 20,000
= RM 20,000
Thus, you are able to buy a property with lesser capital if you opt to go with an under-construction unit where its developer is offering it at a discount. Sounds good? There are more:
#2: 5 Transaction Costs
In addition to a down payment, you would incur the following transaction cost for the purchase of your property:
- Legal Fees on Sales & Purchasing Agreement (SPA)
- Stamp Duty on Sales & Purchasing Agreement (SPA)
- Legal Fees on Loan / Financing Facilities
- Stamp Duty on Loan / Financing Facilities
- Valuation Fees
You may estimate the expenses above with the free mortgage calculator made available at iProperty.com.my via this link:
From it, I estimated the transaction costs for a condominium unit priced at RM 400,000 amounts to RM 15,870. If this unit is fully-completed, you would need to pay that amount in addition to your RM 40,000 down payment. Hence, your capital outlay is estimated to be RM 55,870 (RM 40,000 + RM 15,870), which is equivalent to 14% of the purchase price of your condominium unit.
However, if this unit is under-construction and its developer is generous, these expenses would be waived and paid for by the developer itself. Thus, you have saved an additional RM 15,870 (4% of the purchase price of your condominium unit) if you opt for an under-construction unit.
#3: PSF (Per Square Foot)
For a start, a property that is affordable may not necessarily be cheap. I think it is important to differentiate the two accurately as you may not wish to commit yourself into an affordable property that is expensive.
Next, there are many ways to assess the value of a property. The quickest of all is to calculate the price of a property in terms of its per square foot (psf). Let us use the RM 400,000 condominium unit as an example. Is the price offered now cheap or expensive?
Let us take two units which are located side-by-side. Both are priced equally at RM 400,000 per unit. The first unit is a completed 1,000 sq. ft. unit. The second unit is an under-construction 500 sq. ft. unit. Therefore,
- The first unit is priced at RM 400 psf.
- The second unit is priced at RM 800 psf.
The first unit is cheaper than the second unit despite being equally priced. You may ask, ‘Does it mean that the first unit is a better investment as it is cheaper than the second unit?’ I think, assuming that the overall condition of the unit is decent, my answer is a resounding yes as you have lots of ‘upside potential’ for future capital appreciation. This is because you are buying a property at a price 50% lower than one which is under-construction.
Hence, it is more affordable to invest in a RM 400,000 condominium unit if the unit is under-construction as compared to a fully-completed one. So, does that mean that under-construction properties are cheaper and of better investment value to you as an investor?
In general, a completed unit is offered at lower prices in psf over a unit which is under-construction. This is because it costs developers more to build new units today due to rising cost of land, building materials, labour, …. etc and on top of that, developers aim to make money from their projects. Therefore, before you decide a unit, be it completed or under-construction, you may want to:
- Calculate its price in psf for both units within a vicinity.
- Calculate the price gap between the units.
- Ask questions to justify their price offerings presently.
#4: What You See is …
… What You Get?’ Here, it depends.
If you are buying a completed unit, then, yes. Indeed, what you see is what you get as you get to inspect the property unit before committing to it. Certainly, it reduces uncertainties which is existent to buying an under-construction unit as what you see is really:
- A Nice Fancy Looking Brochure.
- An Impressive Showroom
- A Promise to Receive the Keys to Your Property in Fantastic Condition Punctually.
But, will you get what you see on time? This is where the brand and reputation of its developer comes into play. In general, a reputable developer instills much needed confidence to buyers as they are viewed to be of less risk to:
- Abandon a Project.
- Delay Completion of a Project.
- Handover Units that are Substandard in Quality
- Not Honour its Defect Liability Period
- Not Convert its Master Title into Strata or Individual Title
In general, there are less uncertainties involved in purchasing a completed unit over an under-construction unit.
#5: Are You Fighting for Tenants?
Let us assume, you intend to earn rental income from your property.
If it is a completed unit, it is possible for you to start collecting rental income if the unit is tenanted. In other words, you are buying over the tenancy together with the unit from its previous owner. Otherwise, if it is not tenanted, you may start finding tenants and ask for rents based on its current market rate. This is because the rental market for completed units have been stabilised and hence, is more predictable to tenants, agents and landlords.
If it is an under-construction unit, then, let us imagine. After 24 – 36 months of waiting in expectation, finally, you received the keys to your property. Hooray! Now, you want to rent your unit out to a tenant. But wait! Your unit is just one in 300 – 400 units within a single block of the condominium. More than half of these owners share the same idea as yourself which is to quickly rent out their units to new tenants as quickly as possible.
Uh Oh… You are now competing with 100 – 200 landlords for new tenants. My goodness! The question now is, ‘What makes your unit stand out from the rest of the pack?’ Have you thought about it? In most cases, these landlords would lower their rent rates temporary in order to get their units occupied. With that in mind, the next question is, ‘Are you prepared to settle with a low rent for 1 – 2 years on your property until its rental market has become more stabilised in the future?’
#6: Flip or Flop
‘But, what if, I want to flip a property.’, you may ask. Perhaps, your plan now is to find an under-construction property, grab it early at a discounted price, hold onto it until it is completed, and sell it for a quick massive profit. You believe:
- Your capital outlay is lower as you grab it early with larger discounts.
- You saved transaction costs as the developer of your unit is one who’ll bear the transaction costs (stated in Point 2.)
- You intend to sell immediately upon receiving the keys and do not wish to service the mortgage of your property over the long-term.
Many did it in previous years and made some money especially when our local property market was booming. Today, many flippers are flopping. Why? This is because the property market today is depressed particularly with properties in the higher priced segment. Let me illustrate:
Meet Mr. Tan. He intends to flip a property. Thus, in 2014, he bought himself a fancy unit costing RM 800,000. His plan was to sell his unit at RM 1.1 million as soon as it is completed. Three years have passed. The unit is finally completed. The keys were handed over to him. Guess what? Mr. Tan has failed to secure a buyer for his RM 1.1 million unit despite his best efforts as the market is bad.
It is now 2018. Mr. Tan is forking out nearly RM 4,000 a month in instalments and maintenance fees on his fancy unit. It is practically eating him alive. Thus, he tried renting his unit out to ease his burden. After research, he learnt that neighbouring units are rented, on average, at RM 2,500 a month. This means, Mr. Tan would still be downed by RM 1,500 a month after renting out his unit.
Mr. Tan checked his bank balances and it is far from encouraging. He does not have much and could not afford to hold onto his unit for long. In the end, he’d decided to throw in the towel, offering his unit at RM 700,000, which amounts to RM 100,000 below his purchase price in 2014.
So, am I advocating against flipping properties? Not really. Instead, I believe, if you choose to flip a property, it is best to have the necessary finances prepared beforehand so that you can continue to hold onto your property in times when the market is depressed. The last thing you want is to end up as Mr. Tan where he sold his property at a price below his purchase price.
This leads us to:
#7: Rooms for Negotiation
On the flip side, what if you are an investor who is considering Mr. Tan’s unit?
You are offered a completed unit at RM 700,000 where the vendor who is Mr. Tan bought it for RM 800,000 earlier in 2014. What should you do? You may:
- Accept the Offer and Enjoy the RM 100,000 in Discounts Immediately.
- Counter-Offer at RM 680,000 and Wait for Mr. Tan’s reply.
Let us assume, after rounds of offer countering, both you and Mr. Tan agreed to settle at a price of RM 690,000. Guess what? You have just gained another RM 10,000 and hence, increasing your total discounts to RM 110,000 from an unit that was purchased at RM 800,000.
What about under-construction units? Can you negotiate yourself into getting such lucrative deals? The answer is highly unlikely unless if you are planning to invest 30 – 50 new units from its developer. There is really little to negotiate if you are investing as a sole buyer in one single unit.
#8: Buying Your Next Property …
Are you planning to buy your next property in 6 – 12 months after investing in your first property?
If you buy a completed unit at RM 400,000, in 6 – 12 months time, you would:
- Have Paid RM 40,000 in Down Payment (Point 1)
- Have Paid RM 15,870 in Transaction Costs (Point 2)
- Start Servicing the Full Mortgage of RM 1,845 a month
- May Rent the Unit Out for RM 1,500 a month
You can submit your tenancy agreement to the bank as a supporting document to your loan application as rental income is viewed as a valid source of income.
Assuming that your debt service ratio (DSR) is 50%. The extra RM 1,500 in rent may qualify you an additional RM 150,000 in mortgage. The calculation is:
Extra Loan Eligibility
= Income x DSR x 200 (from the Rule of 200)
= RM 1,500 x 50% x 200
= RM 150,000
If you buy an under-construction unit for RM 400,000, 6 – 12 months later, you would:
- Have Paid RM 20,000 in Down Payment (assume 5% discount as stated in Point 1)
- Saved RM 15,870 in Transaction Costs (Developer Bears the Cost)
- Pay a few Hundred Ringgit in Interest Cost.
- No Immediate Cash Flow Yet as the unit is yet to be completed.
In this case, you would not enjoy the benefits of receiving additional mortgages from the bank as you do not generate income from your property.
Let me put it into context. If you are 30 years old who earns RM 6,000 a month in salary and has a DSR of 50%, you would have:
Initial Loan Eligibility:
= Monthly Income x 50% x 200
= RM 6,000 x 50% x 200
= RM 600,000
You obtained 90% financing for the purchase of your first property which costs RM 400,000. Hence, the loan amount is RM 360,000. Upon completion of your first property, you are left with RM 240,000 in loan eligibility (RM 600,000 – RM 360,000).
If the first property is a complete unit, then, after renting it out, your new loan eligibility could be raised to RM 390,000. It enables you to qualify for 90% loan financing for another unit priced at RM 400,000.
Completed – New Loan Eligibility:
= Initial Loan Eligibility – Loan Amount on 1st Property + Extra Loan Eligibility
= RM 600,000 – RM 360,000 + RM 150,000
= RM 390,000
If the first property is an under-construction unit, your loan eligibility would be RM 240,000. Thus, you may not qualify for 90% loan financing for another unit priced at RM 400,000.
Under-Construction – New Loan Eligibility:
= Initial Loan Eligibility – Loan Amount on 1st Property + Extra Loan Eligibility
= RM 600,000 – RM 360,000 + RM 0
= RM 240,000
So, is Under-Construction or Completed Properties more suitable to you?
Here, let me draw a table to summarise the difference between the two:
|1||10% Down Payment||You Pay||Discounts & Rebates|
|2||Transaction Fees||You Pay||Developer May Pay|
|3||Price per square foot (psf)||Lower in General||Higher in General|
|4||Below Market Value|
|Exist through Negotiations||Non-existent as Price Fixed by Developer|
|6||Immediate Rental Income||Yes||No|
|7||Extra Loan Eligibility after 6-12 months from buying Properties||Yes if you earn rental income from it||No|