This article first appeared in Wealth, The Edge Malaysia Weekly on April 22, 2024 - April 28, 2024
The popularity of property investing among the younger investors seems to be waning. The mismatch between one’s salary and property price is a key reason. However, financial planning experts say these investors should not be hasty in dismissing property as an attractive asset class.
Redza Arbee, the 44-year-old author of Digital Transformation of Money, is one such investor. Just as the title of his book implies, he prefers Bitcoin.
When he sold his property in Bangsar in 2021, it was as if a huge boulder had been lifted from his shoulders. He did not have a long-term debt anymore. He sold the unit at a loss due to personal reasons and because he felt it would be harder to sell further down the line.
“I don’t have to worry about this monkey on my back. Especially if you have a lot of financial commitments, a mortgage can be very cumbersome. It felt very heavy. I don’t need to worry about upkeep, maintenance, taxes or any of the related paperwork.
“At times, I felt like I was not working for myself. I was working to pay off that mortgage,” he says.
Property is also illiquid as compared with Bitcoin, which can easily change hands over exchanges. Redza admits that cryptocurrency prices are a lot more volatile, but he has a way to manage it.
“One way to gain a better perspective on the risk is to look at it from the near-term and long-term basis. For now, I look at Bitcoin as a tool purely for long-term savings.
“In most cases, any money that is needed for the near term, over the next six to 12 months, and day-to-day spending, should not be allocated into Bitcoin,” he says.
“In regard to losses, I think most people have lost money initially in Bitcoin. During my research, I also experimented quite a bit across different platforms and suffered some small losses, but I learnt a lot from the experience.”
Another reason for the aversion to property investing is that the younger generation is drawn to newer options like cryptocurrencies and starting businesses instead of getting jobs and saving, says Bryan Zeng, CEO of FA Advisory Sdn Bhd. The younger generation is more focused on experiences like travel, food and self-care activities instead of traditional tangible items like houses and jewellery.
There is also the emergence of a lot more investment platforms, such as robo-advisory, that allows investors to put their money in a variety of investment instruments easily.
Redza has a strong bias towards Bitcoin as he believes in the blockchain technology underpinning it. Bitcoin is solidifying its position as the digital gold of the world with limited supply and increasing demand.
“At the end of the day, investment is subjective without one definite answer as to how one should approach it. It is about where people want to store the value of their labours.”
“Money is labour. It is a representation of your accumulated labour. So, where are you going to store the value of your labour that gives you peace of mind?” For him, it is Bitcoin.
On the other side of the spectrum is Sean Tan, who helms the popular Instagram page iherng, which has more than 87,000 followers.
At 35, he has set himself a goal of owning 25 properties. And he believes that Malaysians should own at least three properties during their lifetime.
He attributes the thinking to his childhood, when he would follow his aunt around town to collect rent. As a curious and naïve child, Tan asked his aunt why people were giving her money when she had done nothing. “Because they are using my space,” was her response. It was that simple, he recalls.
“From that moment, I got really obsessed with space. Why do people pay for space? I’m obsessed with what makes people pay more for quantity and quality of space,” he says.
While the internet and technology have given rise to new investment asset classes and solutions, they have also made investing in property much easier. An example is Property Genie, which can be used by real estate agents as well. The portal has an extensive selection of listings and detailed images. Users can also use the agent and developer directory to get a clearer understanding of the market.
Through these portals, people can find out information about the condition of the property, past transacted prices, the rent they can receive and more, says Tan. “If you look at this property online and it is worth RM500,000, and the rent is, let’s say, RM2,300 per month, buy it! The rent will definitely be able to cover the monthly instalment.”
Investing in property is not easy. Just like investing in other asset classes, investors need to do their due diligence before making a decision. But the heavy lifting is usually done at the initial stages, notes Tan. Once the property is rented out, you can focus on your active income, family and other investments, he adds. In another 10 years, you can purchase another property with the equity you have built in the first property.
Equity can be built when there is positive cash flow, when the rent received is higher than the instalment. Fast forward 30 years, and the property is completely paid off by tenants.
Interestingly, Tan is renting even though he already owns several properties. This is due to the arrival of his newborn, which made his house too small.
But there is another advantage for Tan and other property investors who rent. Depending on the rent you receive and your mortgage payment, you could improve your financial standing by renting out your house. For instance, if you are receiving rent of RM2,200 a month but paying rent of RM2,000, you are generating an extra monthly income of RM200.
Tan says the banks use the debt service ratio (DSR) when deciding to give out loans. Put simply, DSR is net income divided by the total monthly commitments of a person, including bank and non-bank debt. He says the extra net income of RM200 a month would improve your DSR.
However, if you merely buy a property for own stay and pay RM2,000 per month, you will not be able to purchase another property. “In the eyes of the bank, your DSR is maxed out.
“Hence, from a property investment point of view, we encourage you to buy where you invest and rent where you stay,” he says.
There is no definite answer to whether one should buy or rent a property. But there is some general guidance provided by financial advisers that the younger generation can follow.
Zeng says property as an asset class is illiquid, it might take you months or years to sell. Hence, it is not suitable for emergency needs. Investors have less flexibility in adapting to a changing macroeconomic environment. “For instance, in the recent episode of the ringgit depreciating against the US dollar (US$) and Singapore dollar (S$), a person with liquid investments (such as shares) could switch their holdings fairly easily to a US$ or S$-denominated investment [to gain from the currency movements]. If the ringgit strengthens later, they can switch their foreign currencies back to the ringgit. A person who is committed to property will have less flexibility to manoeuvre.”
Essentially, there is an opportunity cost attached to property as an investment due to its illiquid feature. The money locked down could be deployed elsewhere for better returns.
Zeng’s advice to young adults who have just started their career is to rent a place first, so that they can move when needed.
Datuk Seri Ivan Wong, founder of Property Genie, says when one buys a property, one has to account for the responsibility of maintaining it.
“If you plan to stay in one location for a longer period of time, buying offers stability and potential value appreciation. However, if you anticipate changes in your situation due to career or personal reasons, renting offers more flexibility and ease of relocation.
“Ownership brings the responsibility of maintenance and repair costs, while renters generally face fewer responsibilities as landlords cover maintenance and repairs.”
Yet, the benefits of buying a property are also obvious. Yap Ming Hui, founder of Whitman Independent Advisors Sdn Bhd, gives an example of a person paying about RM1,500 in rent monthly for multiple years, as compared to another person who buys affordable housing, paying around RM1,700 a month for the mortgage.
“At the end of those years, this person who is renting will own nothing. But the person who purchases a smaller and more affordable unit will have a property as their asset,” he says.
Younger investors can benefit from leveraging when investing in property — they only need to pay 10% of the full price of the property, adds Yap. “Property has the leverage effect. Young people can take loans of up to 90% [of the property price]. Whatever appreciation they gain from it is a good return [on investment].”
Moreover, loans do not come with a high interest rate and are calculated based on the reducing-balance method, adds Tan. “Unlike a hire purchase loan where the interest is based upon the full amount, property loans are tabulated daily. For instance, if a person owes RM500,000 to the bank and makes a RM50,000 payment, the interest is calculated based on RM450,000.”
Zeng adds that property can be used to hedge against inflation. However, he cautions younger investors to take note of mortgage rates that could rise and fall depending on the macroeconomic environment.
Yap agrees, saying that a rise in interest rates could significantly increase the cost of ownership over the long term. “Mortgage rate is something that goes up and down and we cannot control it.
‘To cope, make the loan period as long as possible … I always advice [younger investors] to go for a longer period of time and pay smaller amounts. Should there be fluctuations in the interest rate, you will still have room to breathe,” he says.
Just like investing in all other things, due diligence is key, says Tan. The younger investor should always consider the location of the property.
It is also important to know that the first property one buys is most usually not the last. One should avoid seeing it as the “dream home”, which could cause them to restrict their investment choices and overcommit too much capital to the property.
“The mistake many people make when purchasing their first home is that they are only content in finding their dream home, which tends to be a landed property,” he says.
So, what they do is grab any landed property that fits some of their criteria — even if it is situated in the suburbs — forgetting some important facts, such as that they are working in the heart of KL. Factors such as the travelling distance and future prospects of the property are thrown out of the window.
“The concept of a dream home tends to revolve around the concept of luxury, where it is borderline unaffordable. A newlywed couple might want to jointly buy a property they cannot afford. They then put more money into renovation because it is a dream home.
“However, they will have to leave their house early in the morning just to reach KL in time for work. They are back from work at 9pm. So, they never see their house in daylight,” says Tan.
Lastly, take your time. Tan encourages people to visit at least 20 properties before making a decision. Visit a variety of properties, from landed to high rise, old to new. Then you can make an informed and calculated decision.
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