This article was first published in Property Insight magazine February 2015 issue.
When I bought my first property 12 years ago, it was the toughest, both financially and mentally. Financially because both my wife and I have only worked for 5 years and our savings are not high plus both of us have never read a lot about properties before and thus have never prepared for it financially. Mentally stressed too because we felt buying a property is very risky. What if we lose our jobs? What if the apartment that we bought loses its value? There were many unanswered questions. Majority of the friends our age then do not own a property. Frankly, buying early or buying later, which is riskier? How about if we rent? Would there be less risk? What can we do to manage some of these risks? Let’s explore a few today.
Save more before we buy. True? The truth is, our salaries are growing slower than property prices. Since majority of us are working people, there is no way that our salaries would rise faster than the rise in property prices. The reason is because whatever the quantum of increase that may happen, it will be based on the base. We may have a 10% increment but this number is likely to be smaller than a 5% increase in price of the condo that we intend to buy. That’s because the 10% based on a RM5,000 salary can give us an additional RM6,000 per year. The condo that we are aiming might be RM600,000 but 5% meant it has increased in price by a whopping RM30,000. The solution is to buy one when we can afford it. Ifwe could not afford a RM600,000 unit, how about RM400,000? If not RM400,000, what about RM200,000? Never stretch our financial limit too thin, that is the highest risk of all! We may lose everything. A good property is a hedge against future price increase and of course once we have bought, the price increase is now an advantage to us. Time awaits no men is applicable in many situations including the purchase of our first home.
Property bubble is bursting soon. First do we believe a bubble is bursting soon? If we believe in one, the next question would be, when is ‘soon’? 6 months? 12 months? 18 months? What’s our strategy today and after the bubble bursts? If we believe, then have we saved as much money as we can for the past many months? Did we refrain from any unnecessary spending? If we have saved none but continue to cry ‘bubble bursting soon,’ it is not a risk but it is a huge loss of opportunity if the bubble really did burst as per our expectation. When we always miss all these great opportunities, in the long run it becomes a huge risk.
To those who believe that they must wait until the bubble bursts before buying, think really carefully, if we did not dare to buy before the bubble burst, would we suddenly be so brave to buy when everyone we know tell us not to buy during bad times?
The younger generation can no longer afford anyway. Better just rent. Renting forever is never a risk. However, renting for 10 years and suddenly we feel like it’s time to buy our first property, that is a risk. Can we afford one at that time? Do note that the difference between paying rental and paying for a mortgage may be very little. Major difference would just be the first 10% before we get a loan for the remaining. In other words, the rental money could have been your mortgage payment. Assuming the property price rises only 5% per year, after 10 years, that is a compounded 63%. A RM500,000 home today would be RM815,000 by then. That’s not too bad right? The only issue is, the house prices for the locations we like has been rising faster than 5% while areas which have hardly moved, it may not be something that we like. The younger we are, the better it is to buy because we can stretch the repayment period longer and when we are more capable, we can choose to shorten or pay faster LATER. Do not kill ourselves right from the beginning.
Understand the risks when we are not using our wealth to continue creating new wealth. My friend told me proudly that she aims to finish paying for her RM700,000 property within 10 years. She wants to be debt-free. A good goal but to be honest, there is very little difference in having RM700,000 and doing nothing with it versus finished paying for our first home and staying in it. In both cases, the RM700,000 is not doing anything. Yes, the house price is increasing but we could not do anything with it unless we do a refinance. If we want to do a refinance, then why pay so much in the first place? If we do have some money, use it to create wealth. Please remember that overstretching financially is far more riskier than paying off the home loan early and doing nothing with it.
The rich are becoming richer. We, the middle class are becoming poorer. Take out our smartphones, google for ‘income disparity’. Look at all the countries shown. Except for countries we have never heard of, income disparity is happening in every country in the world today. Even in our neighbor down south. Rich people are becoming richer because of how they manage their wealth creation process. The middle class thinks they are poor and believe there’s nothing that can be done. Without any doubt, this would become true after a while. One reason for some of these richer ones is because they create more wealth with the wealth they have. Most of the time, it includes property investment. Question is, do we want to think like the rich people or the middle class. The choice is actually for us to make.
If we think that we should now rush out and buy a property, that is a big risk. The reason why we should buy a property when we can afford one is so that we do not need to struggle even harder a few years down the road when our savings are even lower versus the property prices. The reason why we should not think of property as a ‘sure rich’ formula is because it is not. If there are ‘sure rich’ formulas, why are majority still in the middle class?
Personally, how many friends have told us about their failed property investments? I have quite a number. One told me that he bought a huge semi-detached in a very new area. He thought staying there would be awesome. When it was completed, he did not like the location enough and today, he could not sell that property and yet he has to pay for another one for which he is staying today. Think clearly, if we do not like the location, never believe someone would like that location. Majority of us actually think alike. That’s why middle class is the largest pool in all countries including developed ones.
In conclusion, did we invest in ourselves? For those who are reading this now, I think you are on the right track because you are reading a property magazine. Sufficient knowledge allows us to make a better decision. It does not mean there are zero risks. However, with the right mindset and a good understanding about ourselves and the property market, we are able to manage the risks much better. Under normal circumstances, it may be better to buy earlier than later. However, this highest risk of all? It is to pretend like nothing is going to happen and do nothing. Happy investing or waiting for the right opportunity.
written in Jan 2015 for Property Insight magazine, Feb Issue.
Next suggested article: Property 2015: Gloom, Boom and Doom (first published in Property Hunter magazine, Jan 2015 issue)