Consider this deal: 

Parz is a new condominium project located in Subang Jaya, a matured township that had recently obtained its city status in 2020. It is sleek, modernly designed, and developed with exciting amenities such as a sym, a botanic garden, jogging tracks, sky bar, BBQ area, a jacuzzi, a basketball court, a badminton court, and a grand lobby. It is catered to demands of young working adults and students. 

You visited its show gallery and toured around with a property negotiator. From him, you learnt that the original price is about RM 450,000 for a 475 sq. ft. unit. But, the negotiator explained that its developer is offering a special rebate of as much as 8% if you decide to buy a unit within its promotional period. Instead of placing the usual 10% deposit required by law, all you would need to do is place a small booking fee of RM 9,000 (2% of the original price) to own a Parz unit. As for the remaining 90% of the purchase cost, you can fund it with a mortgage. 

Also, the developer is willing to bear the cost of all legal and transaction fees. In this case, your initial capital outlay is capped at RM 9,000 only. 

So, what do you think? Will you go for it? 

After all, all it takes is RM 9,000 to own a new RM 450,000 condominium unit. 

As you can see, the above is one of the many examples of how new launches of property projects are being promoted and why they are appealing to a group of young working adults who are primarily first-time property buyers.

Maybe, as you read this, you could be considering a purchase of a unit as such. 

Thus, in this article, I’ll point out 4 things to be considered before you decide to book a unit like Parz, whether it is for your own residence or as an investment. 


1. Is the Developer’s Rebate Genuinely a Discount? 

The negotiator says that the developer is offering 8% rebate for a unit at Parz. 

The rebate is RM 36,000 and you think that it is a deal worth considering. 

As investors, we should do our math and come to our own conclusion. 

First, we need to ignore the RM 36,000 in discounts. 

Second, we then calculate the netted price psf for a unit at Parz. 

Here is how. 

The netted price for a Parz unit is RM 414,000 (RM 450,000 – RM 36,000). It has 475 sq. ft. in unit size. Thus, its netted price psf is RM 871.58. Of which, you can take this figure and compare it with other condominiums in Subang Jaya via the brickz.my website. 

I’m positive that you can find decent condominiums where their price psf is less than RM 500 in Subang Jaya. 

For instance, we can still buy a nice 1,000 sq. ft. condominium in Subang Jaya at around RM 430,000. So, its price psf is RM 430, which is half of the price of Parz of RM 871.58 offered to you by the developer. 

Or, you can say the price offered to you is not a genuine discount but a mark-up of 100% from the average price of a decent size condominium in Subang Jaya. 

The RM 36,000 rebate is fake and bogus. 


2. Won’t It Appreciate in Price? 

Look. The price of a Parz unit is RM 871.58 psf. 

The average price psf for a condominium in Subang Jaya is let’s say, RM 430. 

How do you expect Parz to appreciate further? 

Are you expecting people to pay RM 1,000 or more in price psf for your unit? In other words, you believe there will be people who are willing to pay as much as RM 500,000, RM 600,000 or more for your 475 sq. ft. That does not add up as it does not make any logical sense. 

Think about it. 

When you buy your Parz unit, you place only RM 9,000 in deposit. Thus, to you, the condominium unit is affordable. But, once you have received your keys, you will need to find a buyer who is willing to place a 10% deposit and around 5% in all legal and transaction costs to buy over the property from you. 

Thus, if you are trying to sell your Parz unit at RM 600,000, the new buyer must prepare at least RM 90,000 in initial capital outlay to buy over your property. As such, put yourself into his shoes. If you have RM 90,000 to invest, would you be interested in buying a 475 sq. ft. unit or a 1,000 sq. ft. unit in Subang Jaya? 

Maybe, you might even consider purchasing a landed property. 


3. If You Hold Onto Parz for 10 Years 

Once again, let’s say: 

The average price psf for a condominium in Subang Jaya is RM 430. 

Here, let’s assume that the average price psf can appreciate by 50% in 10 years, thus rising to RM 645 psf. 

Guess what. It is still below your netted price psf of RM 871.58 for a Parz unit. 

Instead of appreciation, you will incur a capital loss for your Parz unit. 

If Parz reverts back to the average price psf of condominiums in Subang Jaya, at RM 645 psf, the 475 sq. ft. unit at Parz would be valued at RM 306,375, which is below your netted purchase price of RM 414,000. 

So, your capital loss is RM 107,625 over a 10-year period. 

But, that is not the end of your misery because: 


4. How Much Cash Will You Bleed Every Month? 

Let’s say, the negotiator tells you that you may rent out a 475 sq. ft. unit at Parz for RM 2,000 a month. 

Is that a true estimate? 

Could you use it to compute your projected returns from this property? 

How to find out if the rental estimate is realistic? 

Simple. You can have a rough gauge based on observations and logic. 

Let’s say, if you plan to rent your property out to young working adults, you can ask the following questions: 


a. What is the average income of young working adults in Subang Jaya? 

b. What type of cars do young working adults drive? 


This will tell you if they can afford and are willing to rent a property from you. 

For instance, if their average monthly income is RM 5,000 and they are paying a car loan installment of RM 1,000 a month, will they be okay to rent a place that costs RM 2,000 a month? Can they afford it? 

If they can, what are their choices? 

Would they choose your 475 sq. ft. unit at Parz? 

Without a tenant, you could pay RM 1,540 per month in mortgage installments, RM 260 per month in service charge, sinking fees, quit rent and assessments. In total, your cash outflow per month is RM 1,800. 

If you do not possess a strong cash reserve, you could become desperate and in pursuit to quickly slow down the cash bleed, you will rent it at a low price. 


5. 10-Year Slave to the Bank? 

Here is the worst case for a young property buyer. 

Imagine he is a 25-35 year old individual who earns RM 5,000 a month. He pays RM 1,000 a month in car loan installments and chooses to buy a 475 sq. ft. unit where his installment is RM 1,540 a month. 

His debt-service ratio is a little above 50%. 

If he rents his unit for RM 1,000 a month, his debt-service ratio is 42.3%. 

These are pretty high numbers. 

It would be hard for him to save money after netting off his living expenses, car loan installments and all property-related expenses. 

If he doesn’t have much in his savings account, he can’t quit his job. 

He continues to work and contributes 50% of his monthly income to the bank. 

But, it is hard for him to get ahead financially as his car and property depreciate in value over time. 

That would be a very bad place to be in. 

But, with that being said, there is a way to get out of this predicament. But that is not the focus of this article. This article is about preventive measures, instead of being a cure or a remedy itself. 


Conclusion: Hares Don’t Win the Property Game. Turtles Do. 

What seems to be a fast way to own a property could be a very slow method of building sustainable riches from real estate in the long run. 

What seems like a huge discount from a property developer could be a snare or a trap to mislead property buyers to buy properties at overly marked-up prices. 

What seems to be a fantastic long-term investment could cause one to become a long-term slave to the bank. 

Hares may have a flashy start but they don’t win their property races. 

Turtles do. 

If you can’t afford a property at the moment, it is okay. 

It is better to get the financial basics right first before getting into it. This means if you wish to buy a property costing RM 450,000 and you don’t have 25% of its cost in excess cash (RM 112,500) in your bank accounts, it is wise to boost your savings to that amount before buying a property. 

It may not be a flashy start. 

But, like the turtle, you are winning the race one step at a time. 

Cheers, mate! 


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

    2 replies to "How Not to Invest in Real Estate?"

    • Ian Tai

      Hi Ariff,

      Thanks for your comments, bro. Always good stuff from you. 🙂

      Regards
      Ian

    • Ariff Shah

      I support you bro…keep it slow & steady.. always remember rule #1 & #2 from warren buffett.. and remember cashflow is king , focus on making passive income by robert kiyosaki.. and most importantly gain knowledge as many as you can.. knowledge first, money & wealth will come later

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