When it comes to a home (i.e. a property you personally stay
in), renting versus buying is literally one of the toughest decisions you’ll
ever face.

On the one hand, you have probably been brought up, like
millions of other Malaysians, to embrace the “never rent” principle, because
renting means "helping others pay for their homes".  On the other, you could be struggling to
convince yourself to spend your hard-earned savings on a property, because you
feel you aren’t ready to shoulder the responsibility of being a home owner.

For those who have done your cost comparison between buying
and selling and still can’t come to a final decision, here are some common
approaches and factors that might help you make that all-important decision.

Conventional mathematical approach

Many property experts, especially those based in the US, use
a calculation known as price-to-rent ratio. Just find the average list price
using property websites like StarProperty.my then divide that price by rent per
year.

Eg: Say the average list price of the property is RM500,000
and rental is RM24,000 every year. The Price-to-Rent Ratio would be 500,000 ÷
24,000 = 20.83. Interpreted roughly, this means that if you rented this house
for 21 years, you would be able to own it by the end of that time.

According to online real estate website www.trulia.com,
price-to-rent ratios that are 15 and under indicate buying as being “less
expensive” than renting, whilst Price-to-Rent Ratios that are 20 and above
indicate renting as “less expensive” than buying. Hence, for a property with a
Price-to-Rent Ratio of 20.83, renting is seen as a more attractive proposition
than buying.

According to www.numbeo.com, a website conceived to
calculate global cost of living, Malaysia’s Price-to-Rent Ratios are 16.41
(within city centre) and 24.01 (outside city centre) respectively. For a
property outside the city centre with a Price-to-Rent Ratio of 20.83, you’re
under the national outside city centre Price-to-Rent Ratio of 24.01, which
makes buying more attractive.

Because there isn’t any globally-recognized “golden formula”
in using price-to-rent ratios, you could refer to Trulia’s holistic approach,
or use Numbeo’s statistics as a guideline. But generally, it is commonly agreed
that it would be better to buy if your Price-to-Rent Ratio is lower, and to
rent if it is higher.

However, in view that price-to-rent ratios do not factor in
other considerations such as the cost of buying and renting, the time you
intend to stay in a property, and of course, your personal preference; it is
mostly used as a generic guide or not as the key deciding factor.

The Time Factor

You may not think so, but time is a factor when deciding
between renting and buying, and an important one at that.

Generally, if you plan to stay in a place for just a few
short years, buying it may not be a good idea because of the following factors:

Every time you buy or sell a property, you’ll incur
transactional costs in the forms of legal fees and other related charges. The amount can easily go into five figures.
If you sell within five years in Malaysia, you’ll need to pay Real Property
Gain Tax (RPGT). As of July 2013, RPGT is 15% of your net gain for the first
two years and 10% for the next three years. Additionally, you would also have
paid a sizable amount for renovations when you first moved in. Lastly, in the
few years you have been staying in your home, you would have serviced
substantial amount of interest for your home loan.

All the above can erode whatever earnings you would make
from the appreciation in value of your property if you decide to sell it too
early.

You could, of course, opt to rent it out and hope that the
rental suffices in paying off your monthly loan instalment. But this involves
risk on your part.  If you can’t manage
to rent the house out or can only rent it out at 50% of your monthly loan instalment,
you’ll need to service the rest of your loan commitment out of your own pocket.
This could severely affect your lifestyle or hinder your chances of buying
another property.

As a general rule of thumb, experts recommend that you stay
in a home long enough to allow appreciation in property value to overcome the
transactional costs. This can be up to five years or more, or much shorter in
times of a property boom. But if you’re not so sure about your long-term living
arrangement and you’re not financially stable enough to be able to service the
monthly repayment, renting might be the safer option for now.

Renting VS Buying – The Personal Preference Factor

All the “non-emotional” elements (such as affordability and
time) aside, it’s a good idea to put your personal preference into the equation
when it comes to the battle between renting and buying.

Some people thrive on changes and like the idea of moving to
a new environment every year or so. For some, it may not even be a matter of
personal preference but a matter of being in a highly mobile job. If you fall
under this demographic, renting could be the preferred housing solution
compared to buying.

Then there are those at the exact opposite end of the
spectrum – people who enjoy living a structured lifestyle, or have fallen in
love with a specific location knowing for certain they’d never leave again (at
least not in the short term). In this case, buying a home certainly makes a lot
more sense than renting.

Additionally, some people need to enjoy the freedom of
changing wall colours every season, hanging paintings wherever they fancy and
building DIY contraptions in every corner of the house – which you can do only
if you own the place. But for those who rent, they enjoy freedom of another
kind – the freedom of not being tied down, of being able to move if they don’t
like the place as soon as the rental agreement expires.

Seasoned property investors may argue that even if you don’t
live in it, a home is going earn you rental and appreciate in value over time –
which makes buying not just the preferred choice, but the only logical choice,
when it comes to a home. But not all investors are built the same: there will
always be those who would much rather put their money in higher-risk assets
(such as stocks) or lower risk assets (such as cash) instead of a home. This,
of course, still boils down to personal preference.

Unlike calculations and costs, personal preference is
intangible. It is what makes people do what they do whilst others might do
otherwise. Say your mind is screaming “rent” when the logical choice is to
“buy”, it might be worth your while to listen to that inner voice. Because if
you end up hating the place after living in it for one year, you may find that
selling it and earning your capital back may not be so easy.

RENT or BUY – Your Call

Like most things in life, buying or renting is a question
that cannot be answered by anyone else other than yourself.  While you cannot make a 100% correct
decision, you could consider these tips to help you along the way:

First and foremost, consider your financial position. If the
monthly instalment from buying a house leaves you with barely enough to
survive, you should probably consider another option that lowers your
commitment – be it buying a cheape property or just renting one for now. You
can find out instalment costs from calculators such as this one provided by
imoney.

Ask yourself how long you plan to stay. If you plan to stay
at a place for life, buying is a wise option if you can afford to. But if you
plan to move out in a year or two and do not actually have plans to invest in
properties, renting might be the better choice.
Consider your personal preference. Ask yourself if you’re
happy with the place. Think about the implications of having a permanent home
and whether you can cope with it. If you’re taking a loan, ask yourself if you
are ready and willing to sacrifice certain elements of your lifestyle to pay
for a home for the next few decades.

To help reinforce your decision, you may also wish to
calculate the price-to-rent ratio of the property, just to see where it stands.