Malaysia 2024: Is Buying A Condo Better Than Renting?
The aim of this post is to help individuals decide between renting or buying a property in Malaysia, and be warned, there will be math.
As we imagine readers will be on the younger side, this post mostly makes reference to condominiums, apartments, flats, and serviced multifamily residences due to their proximity to city centres, bundled facilities, and the fact that they’re actually affordable!
Here’s how we’ll break it down:
- We’ll talk a little about buying a property for enjoyment versus investment.
- We’ll share a simple formula that shows when not to buy a property.
- We’ll share another formula to compare gains from investing in a condo vs elsewhere
- We’ll share what an expert on the topic (not us!) has to say.
By the end, you’ll at least be able to spot financially unwise home purchases, and with such an important decision, you can never be too risk-averse!
Let’s begin.
Buying to invest vs consume long term
You buy to invest hoping for monetary gain, and any joy of ownership is unimportant.
You buy to consume purely for joy of ownership, and monetary gain is just a bonus to brag about at family gatherings.
Buying a condo for the first time is inevitably a bit of both, but never an even split.
If you’re looking for a tiny kingdom to rule and raise an army of children for years to come, buying makes sense - if the condo is your top choice and not a compromise.
As Lemmy is a property advisor and children aren’t property, we can’t speak on family planning, but we can help with the investing side of things.
Quickly - to the math mobile!
Breakeven horizon and how to calculate it
A breakeven horizon of a property is the minimum duration of time after which the total cost of renting equals that of buying,
It allows you to quickly tell when it doesn't make financial sense to buy a condo or apartment.
Once you’re a pro, you can include all types of obscure factors like termite mutation and the chances of Elon Musk moving in next door.
For now, let’s keep things super simple with these three terms:
Let's set additional costs at 10% and generously assume the rent never goes up (ha!).
Now we practice with an example.
Let’s say the above condo can be rented for RM5,000 a month or purchased for RM1,000,000, giving us the following values.
This means you would need to rent the condo for at least 220 months or 18 years and four months to equal or exceed the cost of buying it.
If you can’t stay for at least this long, it’s an open and shut case - don’t buy it.
If you can stay this long and afford it, time to consider if you’re buying to invest or consume.
Note: The above calculations are intended as a quick way to screen a property’s suitability, and doesn’t take into account mortgage interest, which will drive the breakeven horizon up.
Estimating and comparing capital appreciation
We’ll use the same example as before.
We’ll be working with two new terms:
To have one less thing to worry about, we’ll assume the monthly mortgage instalment (not accounting for the interest) is equal to the rent you’d be paying elsewhere.
We’ll also assume you’re a total boss and opted for a fixed mortgage.
Now let's set some realistic rates:
- Down payment: 10% of the purchase price
- Property capital appreciation: 3.2% CAGR
- Mortgage interest: 4%
This gives us the following values:
Here’s how to calculate what your initial RM100,000 turns into after 18 years:
- Add 1 to the annual appreciation rate (1+0.05)
- Raise this multiplier to the power of the number of years (18)
- Multiply this by the initial investment / down payment amount (100,000)
100,000×(1.032)¹⁸ = 176,293
After 18 years, your RM100,000 down payment is now worth just over RM175,000, an increase of RM75,000. Capital gains tax doesn’t apply if you sell this condo provided it’s your first home and you stayed there for more than five years.
A few things to consider:
- The 3.2% CAGR is based on a 2023 Property Market Report by the Valuation and Property Services Department
- Made over 18 years, this averages about RM9,800 annually.
- This assumes a 3.2% CAGR over 18 years.
- Property is an illiquid asset at market price, so RM175,000 in property won’t necessarily translate into RM175,000 cash.
- The mortgage interest would have come to about RM30,000 per year for those 18 years.
Estimating opportunity cost of not investing elsewhere
Let’s say you instead dumped the RM100,000 into EPF and enjoyed 18 years of 6% CAGR.
This is identical to the previous calculation but our capital appreciation rate will be higher..
100,000×(1.06)¹⁸ = 285,434
Your initial RM100,000 investment would have turned into over RM280,000.
A few things to consider:
- Made over 18 years, this averages about RM15,800 annually.
- This assumes a 6% CAGR over 18 years.
- This is cash, as liquid as it gets.
- Though no mortgage interest, there will certainly be various fees along the way.
- EPF dividend earnings are still tax exempt as of April 2024.
Based on EPF’s past dividend payouts, It’s not an unrealistic figure.
Of course, you won’t have free access to most of your funds until retirement, even with the proposed Account 3.
Also, property is a passive investment for most - you’re at the mercy of market conditions.
Other forms of investments can be more dynamic where the average person can buy or sell portions of their portfolio.
How are you gonna sell half a bathroom?
We’re not saying buying a property purely to invest is a bad idea, but we hope this section has demonstrated that if capital appreciation is all you’re after, there are definitely other options to consider.
The limit of breakeven horizon and capital appreciation calculations
How’s your noggin doing after all that math?
Just a bit more!
As we said at the start, the purpose of calculating a simple breakeven horizon allows you to quickly filter out condo and apartment units that you should not purchase.
It’s a useful first layer of defence based on numbers alone.
However, just because a condo has a breakeven horizon that aligns with your finances and commitment levels, doesn’t mean you should purchase it.
This is the not-so-easily quantified part, where you consider your feelings.
And we believe this is a good time to see what a modern-day authority on the topic has to say.
What the experts say
David Leonhardt, senior business, economics, and finance writer for The New York Times, recently shared his thoughts on homeownership vs renting for the new generation.
We’ve summarised David’s thoughts below for your reading convenience, but encourage checking out the article or podcast to hear them directly.
When buying is better
- Long-Term Commitment: If you plan to live in the same location for 15-20 years or more, buying might be a suitable option.
- Inter-Generational Wealth: Buying a home can be a way to create inter-generational wealth, as it can be passed down through families.
- Emotional Satisfaction: Owning a home provides a sense of stability, control over the living space, and the ability to customize and renovate.
- Investing with Leverage: Buying a house with a mortgage allows you to leverage other people's money, potentially leading to significant returns if the property value increases.
When renting is better
- Short-Term or Uncertain Plans: If you're unsure about your long-term plans or don't intend to stay in one place for a significant period, renting might be a better option.
- Financial Flexibility: Renting avoids the upfront costs associated with buying, such as down payments, estate agent fees, and mortgage interest.
- Investment Opportunities: Money that would be used for a down payment can be invested in other assets like stocks or bonds, potentially yielding higher returns over time.
- Low Rent Ratio: If the rent ratio (the ratio of home price to annual rent) is high, it might indicate that buying is not financially advantageous unless you plan to stay for a decade or more.
Additional Considerations
- Market Conditions: Housing market trends, including interest rates and property prices, should be evaluated to assess whether buying or renting is more favorable.
- Maintenance Costs: Keep in mind that homeownership involves additional costs for repairs and maintenance, typically covered by landlords when renting.
- Financial Literacy: Ensure you understand the broader financial implications of buying versus renting, including mortgage interest, fees, and potential investment returns.
Kind of feels like the same things that keep getting brought up, huh?
In conclusion
Homeownership is complex and to those considering their first purchase, especially the younger generation, third party advisors like Lemmy can give only two answers: ‘No’ and ‘maybe’.
Sometimes the numbers make it clear buying is a bad idea, especially as an investment.
But sometimes the numbers say it could work, and then it’s really up to you.
And be sure to read our 13 hidden costs of renting condos to make a fully informed decision.
All the best! 😊
