Is this a good time to invest in real estate? Or is it better to wait for the economy to recover?
The idea is to find good assets that generate income and to buy them at discounted prices. Typically, bad economic conditions like the present offer great opportunities to invest in good assets at below their market value.
Here are five steps to help buy property at below market value.
1. Consider secondary or auction market
There are three main property markets – primary, secondary, and auction.
The primary market refers to properties that are yet to be constructed or are under construction, marketed by developers at predetermined prices. These are often sold at a premium to other completed properties in the same area despite generous rebates and discounts.
The secondary market refers to completed properties sold by owners. The prices are negotiable between buyer and seller. In today’s economic conditions, properties in this market are often being offered at 10% to 20% below market value, offering real bargains.
The auction market refers to completed properties being auctioned off by licensed auctioneers. They are typically offered at reserve prices below market value.
The reserve prices are revised downward by 10% for each round of the auction if there are no buyers. Hence, it is possible to purchase a property at a huge 20% to 40% discount.
That being said, buying properties at auction carries more risk than the secondary market. So, the secondary market may be a better hunting ground for property bargains.
2. Look at price points
Here are two ways to calculate the maximum price of a property an individual can afford based on their current financial position.
The 25% rule: This is a ballpark figure of the amount of initial capital outlay needed to buy a property and make it lettable to potential tenants.
This includes the 10% down payment, transaction costs, renovation costs and a 12-month buffer to service the mortgage.
For example, say someone has set aside RM100,000 to buy a property. Divide the RM100,000 with 25%, and the maximum price they can afford is RM400,000.
So, the maximum price = cash set aside for a property / 25% = RM100,000 / 25% = RM400,000.
Debt service ratio (DSR) and the Rule of 200: DSR measures the level of monthly debt payments against income. It includes the mortgage, car loan, credit card debt, student and personal loans. Ideally the DSR should be below 40% of income.
The Rule of 200 is a formula used to calculate someone’s eligibility for a mortgage.
For instance, a RM200,000 mortgage is to be repaid in instalments of RM1,000 per month, especially by those below 35 years old, and the mortgage rate is about 4% per annum. So, how are the DSR and the Rule of 200 used?
Start by listing out all debt repayments – say, RM1,200 for a car loan and RM300 in student loans – amounting to RM1,500. Calculate the current DSR by comparing RM1,500 with monthly income, say RM7,500, which is 20%.
Current DSR = (monthly debt payments / income) x 100% = (RM1,500 / RM7,500) x 100% = 20%.
To keep the DSR at 40%, the maximum loan eligibility for a property = (maximum DSR – current DSR) x monthly income x the Rule of 200 = (40% – 20%) x RM7,500 x 200 = 20% x RM7,500 x 200 = RM300,000.
Malaysian first-time buyers are eligible for a 90% loan-to-value mortgage. Hence, the maximum price of the property that one can purchase is RM333,333. Maximum property price = maximum loan eligibility / 90% = RM 300,000 / 90% = RM333,333.
Now, there are two figures. The first from the 25% Rule is RM400,000. The second, from the DSR and The Rule of 200, is RM333,333.
To be extra conservative about it, one can choose the lower of the two price points. Or, one can go with properties priced between RM300,000 and RM400,000.
3. Stick with the familiar
Look for properties that cost RM300,000 to RM400,000 and are 15 to 20 minutes’ drive from where one lives and works.
Make a list of properties in the price range in the target area. A range of property websites (iProperty, PropertyGuru and so on) offer listings, or, Brickz.my records the transacted prices, which allow one to calculate the average price and type of properties in the target area.
4. Consider price per square foot (psf)
Take Subang Jaya, properties in the RM300,000 to RM400,000 range include Goodyear Court 7 or 8. Properties with built-up areas of 860 sq ft are priced about RM350,000. At Main Place 614 sq ft units are about RM350,000. So, which is better?
One of the key metrics is to calculate the price psf. Hence, properties at Goodyear Court 7 or 8 are cheaper than at Main Place as the price psf for at Goodyear Court 7 or 8 is lower.
Price psf (Goodyear Court 7 & 8) = property price (average) / size = RM 350,000 / 861 sq ft = RM 407 psf.
Price psf (Main Place) = property price (average) / size = RM350,000 / 614 sq ft = RM 570 psf.
5. Inspect and offer
The next step is to engage a real estate negotiator to filter all advertised units and list the final three to five that are the most presentable or suit the criteria. Then the individual can make offers on the most suitable properties.
If the seller is asking RM360,000 for a unit worth about RM350,000, make an offer 10% to 15% under RM350,000. Then, make similar offers for the other units.
Let’s say, over time, an individual has made 10 offers, two or three may come back with a counteroffer or accept the original offer. This opens the door to negotiating the best price for the property. And if a deal cannot be struck, move on.
This article first appeared in kclau.com
Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.
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