Let’s say, you are in your late 20s or early 30s today. Over here, you are thinking of purchasing your first property. It is a major investment and the last thing that you want to do is to screw up on this. Unfortunately, as I write, I had discovered that ‘screwing up’ is very common among property buyers and this has resulted in cash bleeding and a 5-or-6 figure loss in personal net worth.
So, how could we prevent this?
Well in this article, I’ll list down 5 smart hacks that you could apply immediately to buy a property that could potentially build your wealth. They are as follows:
Hack #1: What is Your Plan?
Are you purchasing a home to reside in or an investment property?
Let’s say you are looking to buy a home. The question is, ‘Do you intend to have your parents or siblings moving in together with you?’ or ‘Do you plan to reside in it alone?’. The answers to them would impact the location and the size of the property to be chosen as your consideration will differ based on your intentions for your future residence.
Here, if you want to invest in a property, the ball game is different altogether. In your case, do you intend to keep it for rental income or do you wish to flip it for fast gains? So, the thing here is to know your game.
Understandably, most people (myself included) might not know what they truly want until much later in life. So, in this instance, it is okay to delay the purchase of a property. Now, if you choose to do so, I’m not saying you should be passive and not working towards buying a property. Rather, I think you can be proactive in building your finances while figuring out your plans for your property.
With that, let’s move onto:
Hack #2: Your Needs Could Change Once in 3-5 Years
For instance, you may fall in love and move towards marriage.
Picture this. Let’s say you are a 30-year old single dude. You bought a home and you reside in it. You feel comfortable as the house is bought based on your own preference and conveniences. Then at 32, you meet your partner and her taste, preference, and outlook in life is different from yours. Now, could this affect the choice of property that both you and your partner will stay in upon marriage?
The answer is yes.
Also, your needs could change once you have a kid or kids. Or, your future plans change as a result of a career switch, a migration, or even, a decision to venture into business. They could affect your life priorities and financial status and thus, will almost certainly impact the type of properties that you wish to own.
Am I discouraging you from property ownership?
The answer is nope.
Here, my message is – ‘It is important to recognize that our needs would evolve, change, and be different over time when we purchase a property.’ So instead of fixing your objective to just one, you can consider choosing a property that may enable you to be flexible with your options.
For instance, you may buy a property to live in. That is your initial objective. But then, if you choose to move out in the near future, could you rent it out to earn a decent passive income? Hence, by considering ‘Plan B’ and ‘Plan C’, you could be more flexible to face changes in life.
Hack #3: Keep Your Debt-Service Ratio (DSR) Low
For a start, if you earn RM 8,000 a month and your debt repayment is RM 2,000 a month, then, your DSR is 25%. These debt repayment include mortgages, hire purchases (car loans), PTPTN loans, personal loans, and credit card debts. So, as I write, it is ideal for us to keep our DSR at an optimum level of 30%.
So, if your monthly income is RM 8,000, you should keep your debt repayments at RM 2,400 per month. This is inclusive of the new mortgage from buying your next property, be it for your own residence or for investment.
If you raise your debt repayments to RM 4,000 a month and beyond, you would put yourself at risk of financial stress. That would not be financially wise. Here, I would say that it is better for you to live a financially freer life and not commit a property to yourself at the moment.
But, you may ask, ‘If I earn RM 8,000 a month and my car loan repayment is RM 1,000 a month, does it mean that the maximum mortgage repayment that I can get is RM 1,400 a month?’.
Personally, the answer is yes. The maximum you could really afford is RM 1,400, which also means that your mortgage amount should be around RM 340,000 at maximum. As such, the maximum home price you can aim for would be around RM 380,000. If you want to be conservative, you can shop for properties, which are priced between RM 300,000-RM 350,000.
Properties which are priced in excess of RM 400,000, are out of reach for you at the moment.
Hack #4: Understand Property Valuation
Property valuation is key to avoid buying overpriced properties, which may lead to 5-or-6 figure loss in your personal net worth.
Presently, one of the easiest methods that savvy property buyers use to value a property is to first calculate its price per square foot (price psf). Then, they shall use this figure to make comparisons with other similar properties in the vicinity or location.
For instance, let’s say I’m considering a 1,000 sq. ft. condominium unit, which is located in Town ABC and is priced at RM 500,000. So, this unit’s valuation is RM 500 psf. Next, what I would do is to compare RM 500 psf for this unit with other neighboring units in the condominium. So, if most units are sold and priced at a range of RM 520-550 psf, then, I would say that RM 500 psf for this unit may be a good deal, depending on the condition of the unit.
Also, what I will do is to compare this unit at RM 500 psf with similar properties in the neighborhood. For instance, let’s say, I have found 3 other condominiums and their prices are as follows:
Condominium 1 – RM 450-480 psf
Condominium 2 – RM 600-650 psf
Condominium 3 – RM 1,000-1,100 psf (new development)
1. Would condominiums at Town A appreciate to RM 1,000 psf in the future? So if the answer is no, I would avoid buying Condominium 3 as it is overpriced.
2. Why is Condominium 1 priced the lowest? Is it due to poor maintenance? Or, is it due to its location which may be less strategic among the others? Now, let’s say, the fundamentals of Condominium 1 are solid. I will compare this unit with Condominium 1 to find myself the best deal among the two condominiums.
3. As for Condominium 2, it is good to know why it is priced a little higher. Here, if the fundamental quality of the property is justifiable, then I would compare it with units at Condominium 2, instead of Condominium 1, to make my purchase decision.
Hack #5: Buy Where There is Income Growth
Now, this is important if you want to attain capital growth from your property.
Personally, I believe that the key factor that drives property prices is the growth of the population’s income (income growth). This is because the more income a person makes, the more he could save and borrow for real estate. In addition, it is normal for people to have a desire to be ‘closely associated’ with the rich and wealthy. Hence, this drives the demand for properties in such locations.
As such, when buying a property, smart property buyers would want to find out the main economic activities of the people in the location and have an estimate of the population’s monthly income and spending behaviors.
For instance, let’s say, you find that the population in Town B consists of middle income workers that make about RM 5,000 a month. You noticed that people in Town B drive mostly affordable cars and live a modest lifestyle. Lately, you have come across a 800 sq. ft. house which is priced at RM 800,000 in Town B (or RM 1,000 psf). So the question is, ‘Would you buy this house and expect its price to appreciate in the future?’.
Well personally, I would say no. This is because the overall population could not afford a RM 800,000 property with an average income of RM 5,000 a month.
But let’s say, if the same house is located at Town C. Its population is increasing. Its average monthly income is RM 10,000 and is rising. Then, I would say that in this case, the RM 800,000 property at RM 1,000 psf has the potential to grow in value as compared to it located in Town B.
So there you go, the 5 smart property buying hacks if you are single and looking to buy your first property in the Klang Valley. If you could keep to these 5 hacks, I’m confident that you would avoid needless and superbly costly mistakes when buying a property. Once again, they are as follows:
Hack #1: Know Your Plan when Purchasing a Property
Hack #2: Understand that Your Needs could change once every 3-5 years.
Hack #3: Keep your DSR at an Optimum Level of 30%.
Hack #4: Understand Property Valuation
Hack #5: Buy Where There is Income Growth