“YOU should buy a house because it’s a good investment.”
You have probably heard this many times when attending a property talk or launch.
While it does seem like a logical step to take when it comes to financial planning, you should also think it through before making the commitment as buying real estate can be a hassle.
First, if you are looking at buying a house as an investment, you need more than one property and only then can you consider it an investment.
An investment property is one which you can rent out for recurring income every month, and when the price increases, you can sell it at a profit.
The profit can be reinvested into another property or financial instrument.
The house you live in with your family is not an investment. The price of the property may appreciate but you are probably not going to sell it as you live there.
2019 A BETTER YEAR TO BUY A HOUSE?
For many house buyers, 2019 may be a better year simply because developers are giving a minimum 10 per cent discount and other freebies. The offer may seem too good to refuse but should you buy?
Buyers in many areas have been facing roadblocks to home ownership, such as price growth at a rate that has made buying a property unattractive, increasing mortgage rates and stringent lending rules.
The situation isn’t expected to drastically change this year, but it’s improving.
PropertyGuru Malaysia said investing in real estate is not without its risks.
“But the potential reward of a steady stream of rental income or profit on a sale, investors reckon are well worth it,” said the firm.
PropertyGuru said real-estate investments are popular because although the value may fluctuate, there is an actual physical asset backing any loan.
“However, given the amount of money at stake here, the losses can often be significant. So, if you are planning to invest in real estate, it is important to consider the inherent risks that can make or break your plans,” it said.
SIX CASES WHEN PROPERTY INVESTING IS A BAD IDEA
1) When your debt is too high
Debt is a sum of money that is owed or due. It can be in the form of credit cards, and car, housing, personal and student loans, among others.
PropertyGuru said when thinking of a large purchase like real estate, it is important to consider your risk appetite, current debt situation and your cash on hand.
“Some people are comfortable with a high level of debt while others get anxious at the mere thought. As a general rule, you should keep your debt within the 30-40 per cent range. But of course, every bank has its requirements depending on the individual.”
PropertyGuru advises potential home buyers to calculate their debt service ratio. This is where you add up your monthly debts and divide them by your gross monthly income, which is the amount earned before taxes and other deductions.
2) If you can’t afford the downpayment
The downpayment is typically fixed at a minimum 10 per cent of the total value of the property, but this can vary depending on your bank or lender.
If this is your third property, then downpayment could be 30 per cent as banks will only lend you 70 per cent of the total property value. If you can’t afford the 30 per cent downpayment, then put your buying interest on hold.
Buying a house is a huge financial decision, so it is important to evaluate your financial situation before considering an investment in real estate. What is your current salary? Are you expecting a raise in the short term? What are your monthly expenses? How much have you saved? Why are you investing in real estate with limited resources or no money?
“Asking yourself these questions is a good way to understand your financial capacity,” said PropertyGuru.
3) You need to borrow from too many sources
Borrowing money from multiple sources is a bad idea as you will become heavily in debt in the long term. In such a scenario, borrowers apply for several short-term loans, each having similar interest rates and repayment terms.
PropertyGuru said having multiple loans is bad news because it can negatively impact your ability to make loan payments, leading to you defaulting on one or many of them. Ultimately, this will adversely affect your credit rating, making it harder for you to secure another loan in the future.
4) Good return on investment (ROI) versus bad ROI
For any property investor, the ultimate goal is to get their money’s worth from a real-estate investment.
Typically, a property’s return on investment is its income minus expenses.
If you have invested RM100,000 in a property, and the total profit you made is about RM130,000, your return on investment is 30 per cent.
(ROI = 130,000 - 100,000/100,000 = 0.3 per cent = 30 per cent).
5) The house you are buying requires repair and renovation
When buying a property from the secondary market, make sure it doesn’t require massive repairs and renovation.
Older homes have a variety of structural problems like cracks, corrosion, dry rot or moisture damage in pilings.
“When house hunting, look out for doors that jam or fail to latch, mould and cracks in the wall, stuck windows and uneven floors. Make sure to ask the seller about termites and the plumbing system. Brass and copper pipes tend to last 50 years, while steel pipes can get damaged sooner,” said PropertyGuru.
6) Homes where tenants are hard to come by
Location is a factor to consider when buying a house. Are there good schools around the area? What is the crime rate like? Is the home accessible by public transport? What is the rental rate like in the area?
“Some of these issues can be easily rectified, but others may require a rethink altogether,” said PropertyGuru.