A few days ago, I was speaking to a senior manager of developer and we were talking about home prices. I told him that there has been a few occasions where my purchase was because I feel that the price I was buying into was safe. The price per sq ft for example. Depending on the size of the property, the price per sq ft could have been lower for bigger units and higher for smaller units. However, to buy a property of RM500 per sq ft for a typical 1,00 sq ft unit? That’s a safe decision. Not fool-proof or sure-won’t-die decision but safe enough if one is looking at this on along term basis.
Selling price depends on all costs of development, not just land price…
Ask any developer friend, how many can build a typical high-rise unit and then sell at less than RM500 per sq ft these days? I am talking about new developments. Perhaps the answer could be VERY FAR AWAY or VERY HIGH DENSITY. Else, RM500 per sq ft is a safe decision. The senior manager fully agreed and he said that land price can only go up, material cost can only go up and even he would want the company to pay him a higher salary year after year. This is why property prices go up yeah. It does not need to be that the value has gone up, just the price because of all these pressure. By the way, this is the same whether it’s in Klang Valley or JB.
Please note that for many mature areas, the price per sq ft is definitely higher BUT…
In many established and mature areas, there are nothing below RM800 per sq ft being launched. Perhaps one latest launching right next to the established and mature are could be priced lower a little but that’s about it. For these areas, the next question we need to ask ourselves is this. Are there people who would be willing and could be able to afford the place I bought a few years later at a higher price per sq ft than what I paid for? Always note that the property price can only continue to go up when people could afford them.
Why prices could rise quickly then?
If we remember the years of 2008 to 2013, the price of property could rise very quickly and that’s because the price prior to 2008 was RM250 per sq ft even for a proper condominium. Some in Kelana Jaya was even lower then RM200 per sq ft. I know because I experienced both. However, fast forward to today, it’s 2.5 times or 3 times higher. Did our salary rise by that much during the same period? This is why when we buy nowadays, we need to be aware that the buying decision can o longer be like last time. At the time, it was a simple pick and choose. Today, it better be a comprehensive due diligence before we buy.
Go back to the basics, use rental as a gauge
If the rental for the development could no longer cover the monthly mortgage on a 30-year loan, it means that for now, the price of the property is overpriced. If we are able to find a unit which could still give us a positive return, that’s a sign of a good buy. By the way, people say that the typical yield for property should be 5% or higher. This is so that the return is more than twice the rate of Fixed Deposit.
So how do you calculate your return on investment (ROI)?
Assuming you bought a property of RM500,000. Rental Income per month is RM2,500. Total expenses to maintain the property is RM5,000. Gross Rental Yield calculation is as follows:
RM2,500 x 12 = RM30,000
(RM30,000 / RM500,000) x 100 = 6% per annum.
Net Rental Yield is meanwhile as follows:
(RM30,000 – RM5,000)/RM500,000 x 100 = 5% per annum
There’s also the calculation of Net Leveraged Rental Yield which will give you an even higher yield % but I think let’s just stick to the above lower calculation first for now. Net Leveraged Rental Yield takes into account only the amount you actually paid and not the whole property price because you did not pay for the whole property yet but you took a loan for it instead.
Just because you bought higher does not mean people will keep paying higher
Please do remember that just because we bought higher and higher does not mean that people will be willing or even have the ability to pay higher and higher for it. Happy evaluating very diligently before actually buying it. Buying a property is more than just watching a 360 Virtual Tour video and deciding that’s the property I want. At the very least, it involves driving to the area and actually speaking to the sales person who could answer your doubts and give you actual evidence showing you what he said. Cheers.
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