Top 5 Tips When Buying Your 1st Property

Posted on: 2014-02-21

Buying your first property? Read this guide to make sure you don't end up paying more than you need to and Save Money!

Buying your first property be it for own stay or for investment can be very intimidating yet exciting at the same time. This is not unusual for most of us as buying a house will probably be one of the single largest purchases you would make in your lifetime, and along with the mortgage required for it, getting the whole process right will be one of the biggest ways to Save Money.

In this guide, we will look at ways to Save Money on securing the property itself, for this we want to share with you the Top 5 Tips that you ABSOLUTELY need to be aware of when buying your first property!

Tip 1: Defining Objectives

One must be crystal clear of your objectives when buying your property. The two main objectives are:

(a) For Own Stay
When it comes to buying your first home, it's very easy to get carried away with finding the perfect home. Sorry to burst your bubble, but perfection does not exist. So be prepared to compromise. You need to be realistic with what you can afford given your budget. So make sure you have a BUDGET and STICK TO IT.

(b) For Investment
If you are buying for investment, you then need to be clear if you are investing for Capital Appreciation (rising price of property) or for Rental Returns.

As a general rule of thumb, if you are still young with high future earnings potential, you should focus on properties which are likely to provide the highest Capital Appreciation. But if you are approaching retirement, you should be looking at properties which will preserve its value yet give good Rental Returns to fund your retirement.

If you are buying for Capital Appreciation, one would usually go for off-plan properties (Properties which are sold before they are complete). However, things have changed in the past few years especially in the Klang Valley where there is currently an oversupply situation therefore making it very tricky to 'flip'properties (Flipping is a common term used to describe buying a property on a short-term speculative basis) immediately on completion.

An advantage of buying properties off-plan is that developers usually have very attractive Developer Interest Bearing Schemes (DIBS), making it very affordable for buyers. Under the DIBS, the buyer only has to pay the 10% downpayment on signing of the Sale & Purchase Agreement (or 30% if you already have 2 outstanding loans), and nothing else until you get the keys to your unit. So you don't have to make any progressive payments during the construction period (Progressive payments are payments made to finance a housing loan during the course of construction. Typically, you only pay the interest element of your loan during the construction period).

The public should be aware that although this scheme seems to be very attractive, never forget that the developer would have factored in their finance cost during the construction period into the pricing of the property. Other advantages of buying off-plan is that developers will usually give a lot of 'freebies' such as free legal costs for your Sale & Purchase Agreement and sometimes even for your Loan Agreements too. This will help reduce your initial capital outlay.

If you are buying for Rental Returns, it is advisable to buy properties from the secondary market where the rental yield is likely to have stabilized. Imagine this, if you have bought a unit off-plan which takes 2 years to complete, you will be faced with a lot of competition to let out your unit during your first year. Aside from that, for an off-plan property, you won't be able to collect any rent during the construction period.

Historically, condominiums and apartments have given superior rental yields* as compared to landed properties. However, yields are currently being squeezed as compared to 10 years ago where supply of condos and apartments were relatively scarce. 10 years ago, it was possible to find properties giving yields of 8 - 10% a year. In the current market conditions, you would be lucky to get 7% a year! Given the current market conditions, reckons there are two strategies that one can pursue in search of high rental returns. The first being LRT, LRT, LRT. Properties located close to an LRT station have historically enjoyed better capital appreciation AND better rental returns. And this doesn't just hold true in Malaysia, as it's a trend that is obvious in other countries too. Being within walking distance to an LRT station also gives you a higher chance of finding a tenant sooner. The second strategy is to go for properties catered to the masses i.e. properties priced below RM300,000 in reasonably central locations. Such properties have a real rental demand so finding a tenant will be relatively easy and yields of about 8% is very achievable. The only real risk with this strategy is collection of rent from your tenants given lower priced properties may come with a higher risk of non-collection of rent because of the lower income level of tenants..

*Rental yield is calculated as Annual Rental / Market Value of Property in percentage terms. So for example, if the monthly rent for your property is RM2,000 per month, the Annual Rental is RM24,000. If the market property is RM400,000, the rental yield on this property is 6% (ie 24,000/400,000 x 100%).

Warning! Don't forget to deduct items such as service charges, yearly repairs and maintenance costs and letting agent fees if you are calculating your net rental yield calculations!


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