Ah… there it is, the age-old question of the century. Should you rent a home, or buy instead? How do we draw the line and recognize if we’re making a financially wise, or not-so-wise decision? People move out of their family homes to pay monthly rent and get their own places for numerous reasons. Some common ones that come to mind are – A need for privacy, relocating for the sake of a job, overseas studies, migration. Meanwhile others leave home for more unfortunate reasons – Bad blood with the family, getting thrown out of the house by your folks and eviction. The list is endless, but the goal is fundamentally the same, to have a place of your own.
Renting vs Buying: Is buying more common?
The short answer to the question is a yes. Strangely enough, there seems to be a bias whenever the topic is thrown into a conversation. Particularly for Malaysians, a majority believe that owning a property is always the way to go. Perhaps this has something to do with the fact that society often associates homeownership as a measure of success in adults.
Over time, this causes many of us to anchor homeownership to successful self-worth. We’re sure you’ve heard of the 5C s in life – Cash, Condo, Credit Card, Car & Country Club (apparently, not Choice, Chance & Change). Without the fundamental 3Cs – Cash, Car & Condo, most would not consider you a “successful” individual.
Another reason for purchasing property over renting them is that most times, the concept of owning a home has been drilled into us for a long time. Buying a home, not just having one or renting one, is often perceived as the end all be all, the finishing line in the marathon of life. The absolute happily ever after.
There are however, individuals out there who truly wish to own a property for the sake of owning one, and not just because they were told to do so. But here’s the thing, a lot of us speak of property buying as if it is an easy feat. “Just manage your finances, save up and get your own place. You’ll get there when you get there.” The common crowd has a way of fooling many into submitting to the ideals of homebuying, but offer little to nothing in the ways of practical advice.
That brings us to a question that begs to be answered- Just how feasible and attainable can buying a property be? And at which point does the benefits of buying a home outweigh renting one? There are multitude of factors regarding this matter.
Renting vs Buying: The Malaysian property landscape
First things first, you should know that Malaysia is currently going through a severe phase of property overhang. Property overhang happens for several reasons – A mismatch in seller-to-buyer pricing, poor urban planning, studies inaccurately reporting the state of our property market, the lackadaisical attitude among developers to name a few. And despite the ongoing issues, properties are still as shamelessly expensive as ever.
So, why are Malaysian properties valued at such murderous prices? According to the Global Property Guide, house prices in Malaysia rose an average of 5.2% yearly, 3.3% inflation-adjusted, between 2016-2018. In case some of you don’t know what inflation adjustment is, it means removing the effects of inflation to determine an asset’s actual value – commonly used in investment. Theoretically, if there is a property overhang in our country, housing prices should go down, yes?
Well… yes and no. Since 2019, housing prices have seen a slow but sure downward trend. But property prices have risen so much over the decade that Malaysians still struggle to afford property anyway so it hardly matters. In fact, the National Property Information Center or JPPH reported that the average housing price for KL and Selangor in 2020 was RM778,143 and RM486,659 respectively (data can be obtained here under MHPI 2020). Put simply, the decline in prices is anything but helpful because the bar has been set exceedingly high to begin with.
Pricing and property overhang, two extremely conflicting elements, are insufficient to paint the bigger picture. The other force at play here is the imbalance in the rise of household income to housing prices ratio, which is reported to be 5.6:7.9% as of 2020. Couple that with the recent (and ongoing) MCO that has affected both consumers and property market alike, it’s easy to see people aren’t buying properties still, despite numerous efforts by the government to help consumers afford one i.e.: HOC 2021, RUMAWIP and Rumah Selangorku.
There are many factors undiscussed here that could affect Malaysians’ ability to buy a home. But for now, just know that cutthroat living costs, an imbalance in rise of income to housing price ratio, property overhang, MCO 2020/2021 and expensive home prices as a result of past inflations are what led to today’s property situation.
Renting vs Buying: Renting
Let’s assume the MCO and rising living costs have urged you to rethink your home buying plans and you’re wondering if renting is the better alternative for current housing market. Maybe you are currently renting and would like to find out if your decision is sound. In that case, let’s take a look at some of the pros and cons of renting a home.
Predictable monthly expenses
Instead of saying renting is cheaper, we prefer the word predictable expenses. Rent prices are typically fixed until your tenancy agreement with the landlord ends, in which case it is subjected to renewal and potential rental price review. Until then, having a fixed rental price means more leeway in budgeting your financial situation. You need to prepared rental deposits. Knowledge, or clarity in this sense is power, and that allows you to save up or scale back your expenses monthly. There’s a common perception the longer you spend your time renting properties, the bigger your loss. This is because all the money spent doesn’t build equity, which is true.
A simple analogy is keeping your money in your savings account vs. placing a portion of it in fixed deposits or investment. People have this unshakeable mindset that any money spent must yield some form of return. But not all rental money will guarantee a return, and not all returns are necessarily measured in monetary terms (think mental wellbeing, safety and assurance). Above all, it certainly does not mean any money spent throughout your rental period is “wasted”. Plus, renting puts a roof over your head. In essence, your money is serving you a purpose.
The downside to renting is in the event your landlord decides to increase the rental prices and you find that you can no longer commit to it, or your landlord wants you out of their premise ASAP because they’ve decided to sell it off or stop renting it out, you will run the risk of needing to up and leave at their request. Tenants are essentially nomads. When renting a home, there will come a time where you will be forced to move away, either by choice or by force. This brings us to our next point – Flexibility.
Flexibility
Flexibility can be both a boon and a bane for many. If you’re unfazed by the sudden request from your landlord to move out of their property like we mentioned above, good for you. But if sudden eviction bothers you, then this is the part and parcel of flexibility that you’ll have to put up with. Overall however, renting allows you to relocate with relative ease. If you find your current living space undesirable, you merely have to stick it out until your tenancy agreement blows over before packing up and leaving. Some may choose to terminate their tenancy agreement early, either by providing a notice period, buying out, or locating a replacement in their place. Worst case scenario, you lose your deposit.
Legal repercussions typically do not happen for a few reasons – One, lawsuits cost a ton, which means most affected parties prefer settling things amicably. Two, lawsuits aren’t fun and a simple case can take up to 6 years to resolve, and they are mentally draining. Three, it affects both you and the party pressing charges against you socially, legally and professionally. Unless you have breached some form of agreement as stipulated in the agreement, most people simply do not want to create a hoo-ha out of it.
Either way, the backfire from backing out prematurely from a rented property isn’t as harsh compared to buying a home. With rented properties, you incur a degree of financial loss at most. Though it goes without saying that you should aim to resolve matters as ethically and respectfully as you can. After all, you are putting your landlord’s financial wellbeing at stake too by walking out on them so abruptly.
Easier access to amenities
People living in rented properties like condos or apartments have access to a breadth of amenities. Many high-rise condos typically come with their own facilities, such as a gym, multipurpose court and swimming pool to add to their appeal. Ditto, those living in serviced apartments may have an easier time accessing these facilities as well, with additional perks like laundromats, eateries or a mini grocery mart at their feet, adding a self-sufficient factor to rented properties. The best part is you only need to pay a small portion of maintenance fees to utilize them. Most rental fees include maintenance fees in it, so it’s all part of the package.
It might be a little hard to see the merit if you live in a rented landed property in Malaysia, but it applies nonetheless, especially for those living in high-end gated communities, like a clubhouse. If you live in a run-of-the-mill terrace home, you could technically argue that any recreational parks or “town halls” aka a mini-community hall is a pseudo-amenity. Either way, it all checks out nicely. Imagine you want to build a recreational hub in an owned home if you’ve got the moolah for it. We’re looking at a staggering amount of cost.
On top of all that, you’d need to have a house of approximately 4000-5000 sqft to begin with. That’s pretty intimidating as far pricing goes. Let’s not forget the additional costs you’d have to fork out for specific specs. You’ll be paying for bills for a long time for the sake of these entertainment spots.
Forgetting about decreasing property value
This is the last point on our list for renting. Put simply, not your house, not your worry(ies). People who own properties typically need to keep a close eye on their property value on a quarter-yearly, if not yearly basis. Just because a real estate’s value does not fluctuate by the hour or the day, it doesn’t make them any less impervious to the effects of price fluctuations. Besides, we talked about inflation and housing prices soaring through the roof in the beginning. So there.
Renting a property simply means you’re only living there for a brief period of time. Everything else is secondary. Suppose the area you’re living in suddenly blooms in the property market overnight, and your landlord wants to bump up the rental price. In that case, you might have a reason to worry about the housing costs. Or perhaps your area has suddenly turned into a high crime rate area, your quality of life might take a dip. But neither of these concerns the property value, not unless you’re renting-to-own or looking to resell.
Renting vs Buying: Buying
We’ve talked a great deal about renting and highlighted some of its merits and demerits in the process. Indeed buying a property can’t be that all bad, right? Not at all. While buying a house is a chore and an awfully long uphill battle at that, it does have its own merits for sure.
A sense of belonging
There is truth in the saying that owning a home brings you and your loved ones a sense of belonging. And perhaps it is the same belonging that has motivated many others to pursue the dream of owning a home for a cliché happily-ever-after. There’s nothing wrong with that if you’re willing to spend a portion of your life paying off mortgages and miscellaneous costs to keep the house running. Even a nomad would eventually think about settling down at some point in their lives, simply because the older we get, the harder it is for us to get around with our mobility. You’ll get the pride of ownership.
Just like renting, the value of buying your own home is primarily psychological, and the good that it brings on a psychological level cannot be overstated. Having a personal space of your own is always comforting. You get to decide how you want to spruce up your place, you have a say in where things go, you won’t need to worry about your landlord hounding you for monthly rentals and most importantly, you make your own rules. You are the boss of your house.
The psychological value of owning a place carries a heavier weight if you’re thinking about starting your own family. It’ll be the place for your family and many generations to come.
Building equity
Buying a home is one of the most tedious things you’ll ever face as an adult. There is a reason people say buying a home is a painstaking affair. Even after saving up and purchasing a home, you’ll have to tank upfront expenses, ongoing expenses, additional and hidden costs. And we’re not talking about renovations, furnishings and moving homes; we mean closing costs.
You need to consider this range of factors:
Stamp duty,
Transfer of ownership,
Sales & Purchase agreement (SPA),
Agent’s commission.
All these on top of a 10% down payment upfront and a 35-year mortgage tenure. But here’s the biggest reason people buy a property – To build equity. Building equity is the crème de la crème of property investment. Many aspire to own a property because the financial returns are promising, which is also why the general crowd believes every cent you spend should yield some form of return.
Determining your equity is simple. Assuming your house is valued at RM500,000, you owe RM300,000 on your mortgage. Equity is determined by subtracting the mortgage value from your property value, which in this case is RM200,000. What can you do with RM200,000? Well,
You receive the money and happen to be RM200,000 richer,
Of course, this is a simple summary of home equity. The idea is your home continues to build its value over time without needing you to do much, i.e.: maintenance costs or upkeep. There are two key concepts to note for home equity.
The lesser time you spend paying off your debts –> The higher your equity.
The more your property value increases –> The higher your equity.
There are various other factors you could do to improve your home equity. Upkeeping is one, so is renovating and furnishing the place. Then there’s also the property market that might bode well in your favor. Home equity is an exhausting journey, but the fruit is often sweet to the core when handled well.
A source of stable income
Technically, this could fall under either point above, with your home, your rules and equity return and whatnot. But we thought we would expand on this point even further.
Say you’ve bought a house, but you have no plans to live in it for now. Leaving the place vacant is a waste. In that case, you could consider renting it out to, hopefully, a kind and responsible tenant that won’t leave you feeling like you’ve let your place to a tenant from hell. The residential property could be turned into a reliable source of income.
If renting a place provides you with predictable monthly expenses, buying a place and letting it out will provide you with a predictable monthly income instead. Think of it as a side income to add to your current bread. Though it goes without saying that rental incomes are taxable in Malaysia, so bear in mind of that. If you’re going to spend a sum of money upkeeping your place, you may as well get some of its returns and put the space to good use.
Long-term investment
Another point that falls under home equity, though it can stand on its own too. We’ve previously established that owning a home can help build equity. In financial sense for long-term period, it is good for buying a property. The fundamental principle to having better equity is to pay off your loan in the shortest yet most attainable time possible, or spruce up your place and hope to the property market gods that your property value rises. Getting up to the property ladder could be easier for you.
Let’s assume neither cases turned out well for you. Your equity is subpar and your property value has dipped as a result of the market. One more thing you can do to salvage the situation is selling off your land. This might be a little tricky for condos and apartments, but for landed properties, the value of a piece of land will always appreciate, regardless of the outcome. That said, selling a land is a tricky affair on its own, and requires a lot of due diligence on your end to realize it, so consider yourself warned!
Renting vs Buying: Special considerations
Before we go, we feel that readers should know a few more key things about renting vs. buying.
Debt Service Ratio
For starters, you should be aware that banks look at your Debt Service Ratio (DSR) when determining if you’re fit for a mortgage. A DSR determines if you are capable of paying your debts off without much challenge. This is how your DSR is determined.
Total debt/Net Income * 100
The rule of thumb here is if your DSR exceeds 70%, the bank automatically rejects your mortgage. The other factor that would help you gauge your spending/financial power is to determine if you’re living by the 50-30-20 rule. Granted, the high living costs in Malaysia makes it hard for us to adhere strictly to the recommended ratio, but if you’re nowhere close to the 50-30-20 rule, it may be ideal taking a step back and reassessing your homebuying plans.
Rent vs. Buying calculator
Next, the other factor you should consider is at which point the benefits of buying a home outweigh renting one. Let’s assume you have the following:
Your property is priced at RM495,000,
You are required to fork out a 10% down payment,
Your monthly installment is RM1841.21 (Interest rate at 3.5%, 35-year tenure),
4% closing costs,
RM200 monthly maintenance fee.
Say you were to rent the same property above under the following conditions:
Credits to Rent Vs. Buy Calculator, courtesy of Edge Prop.
Cost: After 4 years, your total cost of homeownership for a RM495,000 home in Malaysia would be RM647,970. Renting leaves you with RM564,033 in your pocket (including the money you didn’t spend on a down payment).
Gain: After 4 years, if you buy, your home will have RM118,177 in equity (available to you when you sell). However, if you rent and invest your down payment and the other money you save, at a 4% return rate, it will earn around RM9,955 in 4 years.
Summary: Looking at your gross costs; equity and investment potential, it’s better for you to buy than rent if you plan to live in your home for more than 10 years.
Bear in mind that the example above is hypothetical and each scenario varies significantly for each individual. Hence, if you ever wish to find out if renting or buying is more beneficial for you, consider inputting your numbers onto a rent vs. buying calculator to get a broader picture of things instead.
Old age
Many homebuyers tend to look at the bigger picture and imagine themselves 30-50 years down the road. At the risk of sounding grim, we often worry if we can live long enough to pay off our loans. Obviously, the goal is to ensure that we can age gracefully and still be in the pink of health, but life can be unpredictable at times. And even with mortgage insurance covering our six, we should always be prepared to weather some storms.
Property types, and not just buying a property, plays a role in old age too. You wouldn’t want to be climbing several flights of stairs to get to your house or bend your fragile back whilst risking a sprain or muscular damage to clean your place in old age. As we age, we tend to incur additional expenditures that we previously didn’t have to upkeep our place i.e.: cleaning fees, plumbing services or electrical works. And the range of prices we have to pay often depends on the property type, i.e., condo vs. landed property.
Also, there is the question of whether any family planning is involved in the picture. If you and your spouse have no plans of starting a family and prefer living a simplistic life, a landed property may be overkill for the two of you. Inversely, if you plan to start a family and intend to pass down your home to your next-of-kin someday, a landed property might be a better fit for that purpose. Then there’s also the matter of your loan being transferred to the subsequent generation if any.
Last but not least, there is the question of death in old age. We talked about nomads settling down at some point in their lives, though there are individuals out there who choose to be free until the day they kick the bucket. There’s simply no hard and fast rule to live one’s life, though it is worth asking oneself if they’re prepared to go through such a phase in old age. Likewise, the question applies to individuals who plan on renting till old age.
Put simply, individuals would have to consider a wide range of factors that play into old age at some point, and all of that will play a part in determining if renting or buying will be one’s ultimate goal.
Summary
There is no straight answer to the renting vs. buying dilemma. Unfortunately, the question itself is complex and requires the consideration of many factors that would affect one’s decision to commit to either one. A factor that may be important to you might be insignificant to another. Therefore, it’s hard to have a one-size-fits-all approach. What we can do however, is to equip ourselves with better knowledge that would enable us to make informed choices on hand, which would translate to a better preparation for what may come in the future, regardless of whether you rent or buy a home.
The dilemma of renting or buying a home is never a straightforward one. There are multitudes of factors that prospective buyers, first-time buyers and renters need to acknowledge at play here that will affect your choice to opt for either one. At the end of the day, it’s important for us to realize that there is no hard and fast rule to homebuying. Ultimately, it all boils down to how we choose to live our lives instead of letting others dictate the major life choices that we make.
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