Advertisements

Should I sell since my rent could not cover my mortgage?

A good friend asked me recently this question. She has a condo and she’s upgrading to a landed. (Haha. Ok, ok… condo to landed is considered an upgrade for this article.). She said, “I am moving out and the potential rental for the condo is insufficient to cover the monthly mortgage plus the maintenance fee. I think the best option is for me to sell and use the money to settle as much as possible for my new landed home mortgage, right?” I told her, if that’s what you want, of course it is okay. In fact no right and wrong yeah. Satisfy own preference. Debt-free is always a good option. Anyway, how much is the condo’s current price and what’s the negative in mortgage like? She said the condo is probably worth RM500,000 and the negative per month should be around RM600. Let’s look at some numbers yeah.

The average property price increase for the past 26 years has been over 6 percent. Image attached. We assume moving forward, this will be much lower. So that our yearly increments can catch up and enable us to purchase a property in the near future. So, we take the property price increase to be half of what has happened for the past 26 years. By the way, it may be even lower or higher, I have no idea yeah. Please ask those senior bankers, prominent property gurus or even valuers for a better idea. I am just like most of you, a working professional here in Malaysia. So, our assumption is 3 percent up every year, moving forward.

My friend’s condo is RM500,000. Negative RM600 per month. RM500,000 x an increment of 3 percent per year is RM15,000 per year. That’s RM1,250 up per month basis. In year 2, it will be RM515,000 x 3 percent up and it will now be RM15,450 or RM1,288 per month. Anyway, let’s look at the next 3 years. Image below:

Initial Amt 3% up (yearly) Monthly Negative Net
Year 1 500,000 515,000 1,250 600 650
Year 2 515,000 530,450 1,288 600 688
Year 3 530,450 546,364 1,326 600 726

We can note one thing. The negative remains at RM600. Actually, rental will increase slowly and is not likely to stay stagnant. The only issue is that the negative number (lower rental yields) may also increase in the future if the property price rises faster than the rate of increment for rental. This is the reason why the rental yield for a property which is increasing in price will always be low or even negative. Only if the property price does not move much and the rental keep going up that the rental yield would show a positive number. I know, there’s also those other assessments like Indah Water or the local councils and even the typical wear and tear if we rent out the unit. This is a risk that comes with property investment yeah. Hey, the property price may even drop if there’s a crisis unfolding. On a longer term though, as shown by all advanced property markets, the property prices will recover and go up as years pass by. At the end of year 3, the same property at just 3 percent up would have increased to RM546,364. As for whether my good friend should sell or still keep, it’s for her to decide lah. Lowering one’s debts will always be a good choice.

written on 12 July 2018

Next suggested article: Financial risks, household debts and lower income households

 

Advertisements

kopiandproperty.com

kopiandproperty.com is everything about property related writings and news. Enjoy reading with a latte.

Related Posts

Property prices falling: excess supply and cooling measures

This was reported by a UK-based newspaper, Financial Times (FT) about the property prices here in Kuala Lumpur. It said that the reason for average sales dropping by 4 percent since last July is because of two reasons; excess supply and domestic cooling measures. Judy Ong of Knight Frank in Kuala Lumpur said, “The inflation […]

Read More

7 things to do while waiting for property bubble to burst

I have quite a number of friends who laughed when told about the potential property bubble bursting. They earn their living from the real estate industry. I also have a few friends who are confidently telling me that when the property bubble bursts, they will enter the property market and buy all the properties at […]

Read More

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Property investment news everyday? Subscribe for free!

An article a day, keeps you updated all the way.

Join 904 other subscribers

LIKE us for property news update, FREE.

%d bloggers like this: