Property Investment 101: If property price is RM250,000 and rental is RM1,000 should I proceed to buy?
I have no answer, really.
Home price RM250,000 and rental is RM1,000. Worth buying? Please decide by yourself yeah. However, I will present to you all the numbers. We shall assume home price is RM250,000 and rental is just RM1,000 and perhaps a maintenance fee of RM200 per month. There are also no links within this article to sell you any property yeah. Now let’s look at the actual calculation part. All numbers come from the tool in calculator.com.my
Age matters a lot when it comes to loan repayment
If the buyer is 30 years old, then the bank would approve loan period of 35 years. Usually, it’s 35 years as maximum loan period or up to 65 years old, whichever is lower. If the buyer is 30 years old or younger, then she will be able to stretch the loan to 35 years. We assume a down-payment of 10%. The numbers would be as below.
Loan Repayment per month is RM1,107. Add maintenance into the number and the home owner would have to pay RM1,107 + RM200 = RM1,307 per month. Meanwhile rental is just RM1,000. In other words, the negative is RM307 per month. Well, a quick answer is not to proceed. Just need to note though that the days when the rental was always above the loan repayment days have passed and I am not sure if it will return.
Any repayment always have two portions; principal and interest payments
However, let us also understand that loan repayment includes both the interest portion and the principal yeah. Interest is the portion which the bank will be earning from you. Principal is the portion which you will earn from the person paying rental. This is what they say as the tenant paying the home loan for the home owner. We look at the first 15 years.
In the 1st year, the interest payment amounts to RM9,489.18 or RM791 per month. The principal is RM316. That’s how you get the total of RM1,107 per month as per the loan amount above. In other words, RM791 + RM200 = RM991. The rental of RM1,000 just barely covers the interest payment + maintenance.
But the home owner still have to pay RM307 per month!
This is true yeah. The home owner will still have to pay RM307 per month because total loan + maintenance is RM1,307 and the rental is only RM1,000. However, as the rental is sufficient to cover the interest plus maintenance fee, whatever the owner pays actually goes directly into the principal; house price.
What happens on the 5th year?
If we look at the 5th year, the interest payment has dropped slightly. It’s RM45,729.20 minus the earlier amount of RM36,941.57. In other words, actual interest payment for year 5 is RM8,787.63 or RM732 per month. If this is the interest and we add RM200 maintenance fee, then the total is RM932. Now the rental amount is able to also cover the principal payment by RM68 every month. Briefly, this is what people meant about tenant paying for the home owner.
What happens on the 10th year?
It gets even better. If we look at the 10th year, the actual interest payment has dropped further to RM7,725.51 (RM86,571.05 minus RM78,845.54) per year or RM643.79 per month. When we add RM200 to this number, it’s RM844 per month. In other words, the tenant is now paying RM156 extra into the principal payment every month for the owner’s house price.
It will get better with every passing year BUT…
Maintenance fee may increase. There are other maintenance costs. There are other statutory payments such as cukai pintu… Stamp Duty… legal fees… Renovation costs… Electrical goods… In fact, even if we did not take all these into account, the actual amount which the tenant is paying toward the principal is very small, even on the 10th year! It’s just an extra RM156 per month while the home owner has had to pay RM307 per month for 10 years! the calculation as below:
RM307 per month x 12 months x 10 years = RM36,840!
Who owns this RM36,840?
When the homeowner sells the home in the future, this RM36,840 belongs to him. Is it easy to earn RM36,840 in 10 years? That’s an average of RM3,684 per year. If we like to earn RM3,684 as interest on a fixed deposit of 3 percent per annum, we will need to save RM122,800 and leave it untouched for 1 year. I am not sure if many of us have RM122,800 in the bank account which we will not touch for 10 years.
Last but not least, REMEMBER this chart too… okay?
There are no property listing in kopiandproperty.com
Whether you think property investment good or it’s bad, there are no listings here yeah. Your decision is yours to make, not mine. I am showing you all the numbers just as that ‘stock market’ expert would show you all the amazing numbers from the stock market. Or some other investment expert showing you all the amazing numbers if you were to invest into what he / she has to offer. The returns are usually more attractive too because they would always be against property investment because as soon as you invested into a property, you have nothing to invest with them for a while. 🙂
Property Investment Disadvantages are also aplenty
There are a lot of disadvantages of property investments too. If you prefer a faster investment return, please do skip property. It’s super slow. In the mean time, do enough study before sign on that Sale and Purchase Agreement yeah. This is not like buying a fish from the market. That one, if you make a mistake, buy again. For property, if you make a mistake, it is a setback of many, many years. Happy reading and please do share any article you find beneficial to you.
All the best and I wish you all the best regardless of what you invest in. Just need to remember investment is compulsory these days. Property Investment is just one of the many choices, not the only one.
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