Lately, I have received a question from KC Tan, a fellow reader on an article that advocates a long-term mindset when investing in properties. The question is:
‘Hi, I’m at a crossroad of whether to hold or to sell. I bought a property 10 years ago for RM 42,000 and now I could sell it for RM 168,000, which is 4x the price I bought. Should I continue to keep it to earn RM 600 a month in rental income or should I sell it off and use the proceeds to buy a larger property which has more potential for capital growth and to earn higher rental income?’
Here is my take:
First, I like to congratulate you for a good buy on this piece of property. You had attained great capital appreciation on it and are still enjoying a nice gross rental yield of 17+% from your current tenant. So, two thumbs up for it!
To answer your question, I’ll start by listing down 4 factors to consider and from them, I’ll be sharing 2 key options that you can choose to raise cash to buy your next piece of property. They are as follow:
Factor 1: Your Age
If KC Tan is 40 years old and below, he may obtain a mortgage where the tenure is as long as 30-35 years. As such, his monthly loan installment is much lower as compared to a mortgage where its duration is 15, 20, or 25 years. In this article, for the sake of our discussion, let’s assume that KC Tan is 40 years old and could obtain a mortgage where its tenure is 30 years and its interest rate is 3% a year.
Factor 2: Your Number of Property Ownership
If KC has 2 residential properties, he would have 1 residential property left after he has sold off the property mentioned. As such, he could apply for a mortgage where his loan amount is up to 90% of the price of his new residential property.
But, if KC has more than 2 residential properties, let’s say 3 as an example, after disposing of the property mentioned, he would still hold at least 2 properties in his name. Instead of 90%, KC could only apply for a mortgage where the loan-to -value (LTV) is 70% of the price of his new residential property.
Factor 3: The Details of Your Existing Property
There are many factors to consider when deciding on keeping or selling off your property. As KC didn’t reveal much about his property, it will be difficult to have a say on what’s best for him and his property. So here, I’ll just briefly touch on 1 key aspect, which is the land title of KC’s property.
If it is a freehold property, KC may choose to keep the property, especially if the property is easy to manage and pays him RM 600 in rental income a month. If it is a leasehold property with 60+ or 70+ years in land lease balance, then KC can choose to sell the property off as leasehold properties could be less desirable if their remaining land leases are below 60 years when compared to others which are either freehold or have a longer land lease balance.
But here, let’s assume that the property KC mentioned carries a freehold title.
Factor 4: The Details of The New Property
Let’s assume KC intends to buy a residential property costing RM 500,000 in the secondary market. If he is able to apply for a 90% mortgage on his property, the down payment required from KC to buy the property is 10% or RM 50,000. If KC manages to get himself a 70% mortgage on his property, he will need to place a 30% down payment to buy his property and this amounts to RM 150,000.
If You’re KC Tan today …
So, let’s put all of the pieces above together where KC is:
1. 40 years old today.
2. Can apply for a 30-year mortgage at an interest rate of 3% per annum.
3. The small property he currently owns carries a freehold title.
4. KC’s property is worth RM 168,000 and he has no outstanding loan on it.
5. The new property KC intends to buy costs RM 500,000.
You have 2 key options to raise funds to buy the RM 500,000 property and they are as follow:
Option 1: Refinancing
First, KC could refinance his property where the new loan amounts to 80% of its current market valuation of RM 168,000, which is RM 134,400. By adding a new MRTA policy, KC’s final mortgage amount could work out to be RM 140,000 and based on an interest rate of 3% per year and a loan tenure of 30 years, the final instalment on his mortgage could be around RM 600 per month which KC could easily finance his instalment with his rental income of RM 600 per month.
With that being said, he needs to pay for the legal fee and its stamp duty on his loan agreement which could estimate to be about RM 2,000. Thus, after paying off these one-off expenses, he can cash out a total sum of RM 132,400 from his existing property.
The best part is this. KC is able to keep his property and enjoy further capital appreciation and rental income growth of this property in the future.
Option 2: Sell it Off
Alternatively, KC could sell it off for RM 168,000. But, he will not get the full sum of RM 168,000 for he would be paying for 3 key items which include agent’s commission, lawyer’s fee and real property gain tax (RPGT). In total, it could cost up to RM 11,993 and hence, leaving KC an amount of RM 156,007 from disposing of his property. This is calculated as follows:
1. RPGT Calculation
2. Final Cash Proceeds from Selling Off KC’s Property
KC’s final cash proceeds will be higher if he utilises his once-in-a-lifetime waiver on RPGT from selling his property.
So, Which of the Two Options is Better?
Well, it depends.
If I’m KC Tan, I would opt to refinance my property, cash out RM 132,400, which could be used to finance a big part of the 30% down payment required to buy a RM 500,000 property because the transaction cost is lower, the speed of having the funds is faster (no need to find buyers) and I can keep my property. This is a great option if I own more than 2 residential properties.
But, I would choose to sell off my property and get the proceeds of RM 156,007 if I like to obtain a 90% mortgage for my new property and if the property has a lower land lease balance. This may take a longer time as he needs to find a nice buyer to buy over his property.
Hope the above discussed is helpful. If you are reading this, you may leave your comments below on whether or not, you would sell off your property or refinance your property to raise funds to invest in a larger property.