Many people wondered why I stay in a rented property while I own properties which I rented out to others. My mother nags most of the time saying I can stay in one of my own properties and that’s my OWN property, rather than staying at other people’s properties.
The Ownership Mindset and “My Own Property” Mindset
Just as any typical Chinese (I am not sure of others), we think that OWNING a property means having assets and the pride of being a property owner. As a OCBC (Orang Cina Bukan Cina, Chinese but not Chinese), I only look at properties as a means or a vehicle in my investment portfolio.
When I painted the house, my mom says “Paint for what? Not your own house…” my dad says, “Should we ask the owner/landlord to also fork half the paint cost?” See? When it is NOT “my own property” we have a different thought that it doesn’t really care. We definitely save a lot. Trust me.
Look, having “my own property” means a lot of things. For the single storey terrace house I am renting as a home now, it is priced at around RM320,000. If I were to buy this property, I will need to fork out at least RM32,000 as downpayment and pay over RM1,540 in installments (for a home loan with 5% interest over 30 years tenure). And being my “own property”, my mother will definitely put in RM50,000-RM100,000 in renovations, new furnitures, new coat of paint, new toilets, new tiles. I would definitely want a new altar table, perhaps renovate a small room for my altar and meditation. I am sure I would want a newly built kennel for my dog and a garden and automatic gate and bean bags and the list goes on and on. All these come from the mindset that “this is my home, I will definitely spend more time here and therefore these are necessities.”
Things do not stop here. The bills continue too. Quit rent and assessment tax comes to about RM800 annually and insurance can cost about RM200 a year, which comes to about RM83 per month. Total monthly cost will be RM1,623.
I rent this property for only RM800 per month for over 5 years. I do have a new altar table, some furnitures and a room with books to feed two bookworms at home. Two nice bedrooms each for my Dad and I, 2 clean bathrooms and a good kitchen for us to cook. Good enough! At RM800 per month in rental vs RM1,623 if I buy this property, I saved RM9,876 a year and over 5 years now, I have saved RM49,380.
What can I do with an excess of RM49,380? I can easily buy 1-3 properties with this cash in hand and generate a 5% returns on investment, perhaps a 6%-12% cash on cash return equivalent to almost RM3,000 a year!
My mom always say… “But after 5 years your home loan is almost 1/6 paid and you are nearer to ‘my own property’…”
Many people think the same but let’s see. In 5 years you may have paid only less than 5% of the principal and still owe the bank a lot of interest. If you sell the properties within 5 years, you are taxed Real Property Gain Tax, which the Malaysian government just increased it up to 30%. If you do not pay the bank loan on time, the bank auction off your property. Try not paying the taxes and see who really owns the property.
Look at the calculation. With RM112,570, I can stay at this house for another 140 months. With RM823 savings per month, this will mean that for every month I pay to own a home, I can stay at this home for 2 months if I rent it.
All is not bad after all. I am not saying buying a property is bad but you must know the objectives of buying your own property. Believe me, many people buy their home just because their peers do so and just because there is a “need” but they can’t explain. For me, property is a tool for me to make higher returns than the bank and/or EPF, as well as a well-padded tool for inflation. Therefore the properties I own are all rented to others.
Some people buy for the sake of the next generation, so they worked hard and paid off the property so the next generation could have a home. However, generations and situations change. My grandfather’s house was already sold a few years ago as all his sons and daughters have own homes and work elsewhere.
I am not against buying your own home but I suggest buying your home with cash or with the lowest loan amount. Say if you buy a RM300,000 property, you can pay RM200,000 in downpayment and the rest of the loan should be paid of as soon and as early as possible. Owing a home seldom comes with cashflow returns but if you could do it, then that will be the best choice. This means that, if you rent for RM800 and if owning a home saves you this RM800 monthly or its installment/expenses comes to less than RM800 per month, then it is all well worth it.
Another point to note, owning a home also means you gain in property appreciation. This house was only RM290,000 5 years ago, and now could fetch up to RM320,000. An average of RM30,000 in appreciation value over 5 years means a gain of average RM6,000 per year. You do not gain this if you only rent the property. However, not every property appreciate in value. Take a look at Bukit Beruntung and Rawang.
I hope this blog gives you some space for thought.