Lately, I read an article that discusses the 3-3-5 rule in property buying, be it for our own residence or as an investment. This rule provides three main measures to compute the maximum price of property that we could really afford. Here, in brief, the 3-3-5 rule is as follows:

So, let us take a residential property priced at RM 500,000 as an example. Here, let us also assume that you are buying your first real estate and below 35 today. Based on the 3-3-5 rule, you will need: 

#1: Initial Capital = RM 150,000 

I find this figure reasonable. This is because, in Malaysia, we are required to put a 10% down payment to purchase a property. In addition, we need to prepare 5 transaction costs that will collectively amount to 3%-5% of the property’s price, a sum to refurbish our property, and a reserve fund of as much as 12 months in mortgage instalments. Thus, the initial capital breakdown is as follows:

#2: Minimum Income = RM 5,427 per month 

It is calculated as follows:

I would say this figure should be much higher and more so, for buyers that have existing debt commitments such as car loans, PTPTNs, and so on and so forth. It is also too much to ask a person making RM 5,000 a month to raise RM 150,000 in initial capital to purchase a property, even if he saves 30% of his income. 

Instead, you could aim to keep your total debt-service ratio (DSR) at below 30% of your monthly income. This means, if you pay RM 1,500 per month in car loan installment, your total debt commitment after buying this property will total up to be RM 3,309 a month (RM 1,809 + RM 1,500). 

As such, in your case, you need to make at least RM 10,000 per month to afford a piece of property costing RM 500,000.

#3: Minimum Annual Income = RM 100,000 

Yup, a person who earns RM 10,000 a month, is able to afford a property priced RM 500,000. It is more likely for him to raise the initial capital needed and keep his new total DSR below 30% after purchasing the property. 

Hence, I believe that the 3-3-5 rule in property buying is highly applicable to us, as local property buyers in Malaysia.

Does it Mean that … 

Only people in the T20 category are better positioned to buy a property? 

The answer is yes. 

What if you are currently in the B40 or in the M40 categories? 

I would say, if you are reading this, it is very likely that you have a sincere desire to move up your ranks to become part of the T20s in this nation. Thus, I believe that your primary focus is to grow your monthly active income by being a much more productive employee or business person in the marketplace. Your returns from upskilling can be much greater than purchasing a piece of property. 

Think about it. 

Isn’t it okay to temporarily withhold your desire to purchase a property in order to work on your personal finances? 

You can always come back into the game with a much stronger financial footing in the near future. 

‘But I Don’t Want to Upskill’

‘I was told that I could buy properties with little or no money down.’ 

‘I do not need to be a high-income earner to buy a decent piece of property.’ 

‘I do not need to pay for legal fees and stamp duties as stated above.’ 

‘In fact, I was told that I could get cash back for buying properties presently.’ 

You may tell me all of the above. 

You may even opine that the 3-3-5 rule is just plain ‘dumb and stupid.’ 

That is okay. I am not here to change your opinion and I am certainly not a guru or a property expert myself.

Instead, I am here for you if you are a first-time property buyer and you want to be conservative and logical in your first property purchase. Now, you may think, ‘How is it possible to buy a property with no money down, without paying legal fees and stamp duties and yet being able to receive cash back?’’Is this too good to be true?’’Is this a legitimate way of buying properties in Malaysia?’ 

Well, first and foremost, I am not a legal expert. 

But, I do know that the subject of its legitimacy is highly debatable. So, I think it will be helpful for you to seek professional legal advice in regards to this matter. 

Personally, if you do not wish to be bothered by its legitimacy, I suggest all of us take the high road, placing the required down payment for our property. Here, I admit that this will be a slower way to buy your first property. But, I believe this is a more sustainable way of building wealth in real estate in the long run. 

The ‘Less Heard’ Stories told by Property Investors 

As I write, we heard glorious stories of how a 4-figure income earner could turn his fortune around by investing in 2-3 properties within 6-12 months. These are stories that either baffle the common man on the street or excite one who likes to achieve the same feat for himself. 

Many were drawn on the good side. 

Many more failed to consider its down side. 

There are always two sides to a coin. 

So here, let me share another angle to the commonly known property fairy tale that is less known to most people. 

Supposedly, we have a young dude who is eager to buy his first property. 

He has a decent job, earning RM 5,000 per month, and has limited savings. This dude has a decent car where he pays RM 1,000 a month in car loan installment. He has no other debt commitments apart from his car loan. 

He was attracted to the idea of buying a property with no money down after he attended a webinar session. Subsequently, he enrolled into a real estate course. Then, the dude bought himself two properties in quick succession, elevating his monthly debt commitments from RM 1,000 to RM 4,000 per month, equivalent to a whopping 80% of his current income of RM 5,000 per month. 

Despite this, this dude was not worried for he received ‘cash back’ and believed that his properties could be easily rented out for income. In contrast, he started to feel proud of himself as the ‘value’ of his properties are almost RM 1 million. 

Then, reality hits. 

After receiving keys to his properties, this dude struggled to secure tenants that could pay the amount of rents he is asking for. His struggle went on for months. During this period, he has to service his mortgage installments and pay for both service fees and sinking funds on a monthly basis. 

Shortly after, the world was hit by the COVID-19 pandemic. 

This dude received a pay cut. His properties remained unoccupied as a result of movement control orders (MCOs) in the nation. His income fell but his monthly debt commitments remained. They led to a fall in his bank balances. By now, he is in financial hot soup and uncertain if he can hold onto his properties over the long-term, despite him receiving loan moratoriums. 

Could he sell off his properties? 

Well, likely not, especially if the offers are below his outstanding mortgages. So, it is more likely for him to keep his properties to the best of his abilities. 

He risks being classified as an AKPK personnel or loses his properties if he starts to default on his mortgage payments. 

The Moral of the Story: 

In conclusion, the 3-3-5 rule serves as a practical guide to determine how much is the maximum price of a property that we could afford. It promotes an idea of sticking to what we can really afford when it comes to purchasing a property. In a way, it also promotes property financing that is responsible and conservative. 

Currently, if you cannot afford a property after applying the 3-3-5 rule, I believe it is okay to not purchase the property. But, with that being said, don’t stay idle. Focus instead on increasing your active income and savings. You can always buy a piece of property when your finances are much stronger in the future.

Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in 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 Co-Founded, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

    4 replies to "Revealing the 3-3-5 Rule in Purchasing a Property"

    • Ian

      HI Ariff,

      Well said, bro. Like your analogy on herbs medicine. In the perspective of TCM, it is meant to enhance the immune system of the body on a progressive basis, rather than a quick fix.

      True, best to not compare with other people. A constant homework for all, including myself. Should channel focus on stuff that are more productive.


      • Ariff Shah

        Keep doing what you loved, don’t settle…

        • Ian

          Sure do, bro. Thanks for your support and encouragement.

    • Ariff Shah

      This 3-3-5 is very good bro.. like herbs medicine, its bitter but it will help you cure.. As i learn long time ago in school for subject “Kemahiran Hidup ” (if this subject still has in school today), the 3 most basic needs for people are Home, Clothes and Food. So for me, focus to buy home first. Even if the home is small, then we start buying small house first. Then upgrade to apartment ,to condo, to terrace, to semi-D, to bungalows, etc. Most important, stop comparing with people lives (most probably this is an impact from watching/browsing social media), just focus on yourself to increase income for a better life.

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