Over years, as a real estate investor, I have learnt that a property is more than a place of residence. Today, as we become more urbanised, different people tend to attach different meanings to what a property is. For instance, a property may be viewed as one that:
- Offers a sense of security to loved ones.
- Has a legacy or sentimental value to be cherished and preserved.
- Generates wealth via rental income and capital appreciation.
- Is a trophy or a status, indicating a milestone in one’s life.
How one sees a property will influence property decisions, be it buy, rent or sell in the future. Here, I would discuss the age-old debate of “buy vs rent” where it focuses on maximising financial wealth. So, which of the two makes more sense financially? Let’s take a look.
One Major Caveat
First, I would say that one would be eligible to choose between the two, if he or she is in the Klang Valley, has:
- Monthly income = RM 10k
- Cash reserves = Minimum RM 100k
This is because purchasing a property is capital intensive and requires the buyer (owner) to commit to property related expenses on a monthly basis. If a person does not earn RM 10k a month and does not have RM 100k in cash-in-hand, it’s better for him or her to refrain from purchasing a property. In this case, renting, not buying, would be a practical choice financially.
Case Study: RM 500k Condominium
Consider two choices to reside in a RM 500k condominium:
- Option 1: Buy it.
- Option 2: Rent it for RM 1,500 a month.
Which of the two options would be more ideal?
So first, for each option, their financial commitments are as follows:
Option 1: To buy it, you need to prepare around RM 100k for the following:
- Down payment = RM 50,000.
- 5 Transaction Costs = around RM 20,000
- Renovation + Refurbishment = RM 30,000
The 5 transaction costs include:
- Sale & Purchase Agreement (SPA)
- The stamp duty for SPA
- Loan Facility Agreement (LFA)
- The stamp duty of LFA
- Property valuation report.
Then, you would incur around RM 2,415 a month in property-related expenses:
- Mortgage interests = RM 2,150 a month (70% are interest costs).
- Service and sinking fund = RM 200 a month.
- Land and assessment taxes = RM 50 a month (RM 300 a year).
- Fire insurance = RM 15 a month (RM 180 a year).
Finally, to sell it, you would incur:
- Agent and legal fees (2-3% of future selling price)
- Real Property Gain Tax (RPGT)
Option 2: To rent it, you would prepare RM 3,500 for the following:
- 2 months security deposit = RM 3,000
- 2 months utility deposit = RM 500
Subsequently, you rent the property for RM 1,500 a month. Once you decide to relocate, you would receive your RM 3,500 in deposit and move on.
What if You Choose Option 1 – Buy It?
The pros are:
- Security = having a permanent place to stay.
- Pride of ownership.
- Participate in future capital appreciation / depreciation of property.
The cons are:
- High initial capital outlay = RM 100k.
- Loss of flexibility in using the RM 100k in funds.
- Continuous interest payments = calculated on a daily basis.
- More effort and time to dispose of the property.
What if You Choose Option 2 – Rent it?
The pros are:
- Not capital intensive = You still keep most of the RM 100k.
- Flexibility in using capital.
- No need to pay insurance + land & assessment taxes.
- Simpler process to terminate rental agreement and relocate.
The cons are:
- Relocation risk if the landlord opts to terminate the rental agreement.
- No participation in future appreciation / depreciation of property price.
How Would I Choose?
Personally, I believe that it is common for one to have a “lifestyle change” in 5-7 years once. Such changes may change our demands for a property and they will prompt us to consider a potential buy, a rent or a sale of a property.
To name a few, these changes include:
- Changes in employment / vocation.
- Singlehood to marriage.
- Starting parenthood.
- Enrolment of children into primary / secondary schools / universities.
- and so on and so forth.
For instance, one who is single may buy a property based on his own needs and wants. Then, if he is married and now has a child, he may relocate to a property that is more suitable for raising a family.
Because of such changes, the number of people buying a home to live in it for a period of 20 years, 30 years or even a lifetime is declining.
So, between “buy or rent”, I believe one should consider the “chances” of his or her lifestyle changes for the next 10 years. For instance, if one is certain that his or her lifestyle would be stable and has the intention to reside in a location that is familiar to him or her, then, buying is a good option.
However, in the next 10 years, if one may expect several lifestyle changes:
- Change in vocation.
- Change in marital status … etc.
Then, it is better to rent.
In addition to lifestyle consideration, I would consider one addition factor and it is:
The “Actual Market Value” of the RM 500k Condominium
To recap, if I buy the property, I would incur the following monthly costs:
- Mortgage interests = around RM 1,505 (RM 2,150 x 70%)
- Service and sinking fund = RM 200 a month.
- Land and assessment taxes = RM 50 a month (RM 300 a year).
- Fire insurance = RM 15 a month (RM 180 a year).
That is RM 1,770 a month which is RM 270 a month more than if I rent to live in the RM 500k condominium. So, is this additional cost to buy the unit worth it?
If transactions of similar units in that condominium block average RM 550k, this means, the condominium is offered at 9% below its market value. Thus, I would buy the property at RM 500k because the impact to my net worth is minimised.
Before:
After:
My net worth may recover back to RM 100k and grow beyond that as long as:
- I continue to service my mortgage instalments.
- The condominium appreciates in price in the future.
But, if transactions of similar units in that condominium block average RM 450k per unit, there is no incentive to buy this property. If I buy, my net worth will be reduced by RM 120k to negative RM 20k. Ouch!
So, Which is Better for Wealth Building?
Is it to buy or rent your personal residence?
My consideration would be as follows:
- My income level and cash reserves.
- My lifestyle consideration – stable or might be changing.
- The difference in monthly costs between buying vs renting.
- The difference between property price vs property’s actual value.
I believe the four listed above are a good guide to make better decisions.
Relevant guides:
1. Revealing the 3-3-5 Rule in Purchasing a Property
2. 5 Steps to Raise Funds to Buy Your First Property
3. Should I Buy or Rent My Personal Residence?
