Buying my first property

Hi Money-Makers,

Mrs. Money here. I finally bought my first property – hoorah! I’m really glad that I’m on track with my short-term FI plan that I set out when I started this blog, just over a year ago.

In this post, I will share the journey towards purchasing my first home – the what, why and how. What started as a pie in the sky, soon led to me poring through blogs and property sites, talking to aunties and uncles, driving around suburbs like a creepy stalker, and whipping out my (phone) calculator to make decisions about the largest investment of my adult life.

House hunt 1 _ gate
One of the many cute little houses I stalked from my car. This one was in Subang Jaya.

Coming from an Asian family, buying a house was something we were encouraged to do right out of the womb. It’s a sign of financial maturity, independence, and most importantly, completion of one of our three core filial duties (the other two being married and having children). I also set my sights on buying a property as a means of cultivating a habit of savings towards a worthy goal

Early questions

However, as I was building up my savings, I found myself asking some questions: Should I even invest in a property? Are there better investments? Is it more financially savvy (and convenient) to rent for life instead of buying and maintaining a home? What is the true cost of home ownership? Am I ready to commit to such a huge investment?

This is a personal choice, and ultimately I decided to do it for two main reasons: 

  1. There is a lack of low-risk, secure investment options with stable, long-term returns in Malaysia (see Mr. Money’s post on the high fees associated with unit trust, as one example). Property prices have been averaging at almost 8% capital appreciation yearly in the Klang Valley (including rental yield), which is better than most other secure investments you will find in Malaysia.
  2. Know thyself: As someone who needs and values certainty, my ideal future envisions a roof over my head which no one can take it away from me (except my bank if I default on mortgage payments, of course). There is also something oddly secure and satisfying about owning a piece of land on our finite planet. And really, there are not many investments that you can actually live in.

Sure, there are downsides. It is expensive to maintain a house. There are costs of fixing busted pipes, roof leakages, paying quit rent and assessment, periodical maintenance such as painting the house and other random things that need to be seen to and that can be damaged over time. Dealing with tenants who may trash your home and more importantly, cause mental anxiety, compounds this. Then there’s the high upfront cost involved in the down payment and other fees. Capital appreciation also means nothing unless you plan to refinance your home, or when you actually sell your property and receive your gains. Otherwise, a house is an illiquid asset, sitting, waiting, hoping to be the goose that lays the golden egg of an above average capital appreciation at the point of sale. 

In any case, I decided the value (financial and emotional) outweighs any negative aspects of home ownership, especially as my pot of savings grew larger and I could begin to contemplate affording it. 

The next questions I needed to decide upon were (a) budget (b) location (c) type of property.

The easy part: deciding on a budget

I decided this based on two figures:

  1. First, was the amount I was able to set aside every month for the mortgage repayment. I calculated this by taking my nett salary – (monthly expenses + an additional 10% for additional savings/investments/emergencies), which meant that my mortgage repayment on a monthly basis would be close to 40% of my take home salary. To be conservative, I based my nett salary on the fixed part-time position that I had, disregarding any income that I occasionally get from other consultancies as that was less predictable. Based on this monthly figure, I worked out what the purchase price should be.
  2. Next, I needed to make sure I had enough upfront cash to be able to purchase the property – which is roughly around 15% of the total purchase price. This includes 10% for the down payment (most banks will give first time young home-owners with a good credit score a 90% loan), and around 5% in total which covers lawyers fees, stamp duty, valuation fees etc. This was the figure I had been working towards over the past few years. 

These calculations were just a guiding post. Since I took almost one and a half years from the time I started to look, to when I actually bought a place, my income increased and so did my budget. However, I would be cautious about being too flexible with that figure. You don’t want to be stuck with a massive loan that you will struggle to service.

The next two questions were harder. I felt like I was going around in circles, without a clear direction as to what property to buy and where. There seemed to be an infinite number of ways to look at it. 

The hard part: What, where…. and how?

Research, research, research

I went really nerdy with this next stage. I started by creating a Google Doc titled “First Home Purchase: Notes”, where I stored all links to sites, notes, and my reflections on criteria that I wanted to consider in my process of determining what property to buy. I pasted good articles, which included those that had strategies to start investing in property, good areas to buy properties in Kuala Lumpur, how to calculate rental yields, tools to compare properties for investments, freehold vs. leasehold, and anything else that was remotely relevant or insightful for my search. 

Narrowing down the search criteria

Then I chanced upon an article by KC Lau, sharing tips by Faizul Ridzuan. It had guiding questions and tips that can help set direction for anyone considering buying a property. These included understanding your long-term objectives and risk appetite, and then asking if this property will help you in achieving that. 

My risk appetite is low, and my long-term objectives were to be able to retire comfortably with a reliable stream of passive income. But I also wanted at least one house that I could call my home. A place I can possibly retire, or sell off at a later time to take advantage of appreciation or if I ever needed the money. Some additional advice he had included:

  1. Old is gold: it is better to go for an old property that is valued at lower per square feet, than a new, more expensive one in the same location.
  2. Go mass: go for a property that the mass market can afford
  3. Landlording (buying to let): this helps with your holding power in a financial crisis, and having rental as part of your income will help in obtaining future loans.

And of course, every other article talks about the importance of location, location, location.

Using all the information I researched and applying it to my personal goals and situation, I had a clearer sense of what I was looking for, which was: 

  • A central location (surprise!). I wanted somewhere in the Klang Valley, and some locations I was considering were Subang Jaya, Bangsar, and Petaling Jaya – the latter two being locations I had lived in for most of my life and was therefore very comfortable with.
  • A landed property instead of an apartment. I had initially been open to purchasing an apartment, but given the massive oversupply of condominiums in Malaysia, did not feel confident in investing in one. While rental yields are always higher for condominiums, I was prioritizing capital appreciation over time, rather than shorter-term gains.  
  • An older unit. I did not want to be paying a premium for the “newness” of a house which will wear off over time. 
  • Buying to hold, with an option to either occupy it myself, or to let.
  • In a decent condition, not requiring significant renovations. Mr Money always reminds me that it’s rare to be able to make back any money spent on large renovations in terms of improved rental yield or capital appreciation over time. For example, spending RM50,000 in renovations to improve my bathrooms and kitchen might bump up my rent by RM300, at most. This means that I would make back that initial investment only after 14 years of renting it out! This is not counting interest foregone (and the fact that our bathroom is now already 14 years old). While renovations and upgrades make sense for own stay, I would be very cautious about excessive renovations hoping that it will yield returns over time. 

The hunt begins 

This next step was basically one year of my life. 

I started contacting agents for viewings and spending hours every week on online property sites like Iproperty and Property Guru; using their filters to narrow down and save properties based on location, budget and type. A real estate agent with 30 years of experience, my dad was at hand to dispense tips and advice: see as many houses as possible, ask as many questions as possible, and take this opportunity to really learn and process options so you are ready when the right property shows up. 

He also gave me some really useful questions/things to look out for when viewing properties, including:

    • What has been the historical price trend of the area?
    • Is it close to public transportation?
    • Is it close to supermarkets, restaurants, universities, colleges?
    • Is it a mature area? 
    • How old is the house? Do you need to change entire roof, plumbing and wiring etc?
    • Is it currently tenanted? How much are they paying? How long have they been renting for (especially relevant if you are looking to buy-to-let)
    • What are the demographics of your neighbourhood?
    • Is it easy to get in and out?
    • How many families have lived there before?
    • Why is the owner selling? (so you have a sense of your negotiating power)
    • Is it freehold? (freehold is generally seen to be of higher value given limitations with the latter, although you can always try to negotiate down for leasehold properties). 

Some things to avoid:

    • House with the number 4 is generally seen to be bad luck in Chinese culture, limiting resale/rental value. 
    • Be aware that houses facing certain directions are preferred by certain religious or cultural communities. 
    • A house facing a T-Junction (also considered bad luck, limiting resale value)
    • Any place of worship nearby – due to traffic congestion and noise pollution
    • Houses near overhead power lines
    • House elevation: houses at a lower level than the road in front of it.

Finding “the one”

With these questions and tips in mind, I set off viewing single storey houses in Subang Jaya, Petaling Jaya and Bangsar over the next year. It almost felt like a part-time job, and I must have seen 40 – 50 houses in total. But what that meant was when I saw the house that I eventually bought, I had enough knowledge and “feel” to know it was the right one. I also got great ideas for house design (and things to avoid; e.g. silver wallpaper against bright red ceilings, ugh), learnt about different neighbourhoods and how people lived, increased my confidence in negotiations, and learnt so much about the property market – which were all great life skills to acquire. And because I had the luxury of time (thanks to the lacklustre property market), I didn’t have to stress through the decision, which made it so much more enjoyable. 

I ultimately purchased a single storey link house at a great location in Bangsar with commercial potential for a price below market value. And contrary to my greatest fear, I didn’t have buyers remorse or any commitment issues when I wired over the massive sum for the down payment!

Antipodean_VKeong
One of the many adorable (and “atas”) cafes in Bangsar area. Photo credit: VKeong

Top tips

As I’m just about to collect my keys and begin my (very basic!) touch ups to the house, I have been reflecting on what I’ve learned through this process and want to share my takeaways:

  1. Understanding your needs and how buying your property helps you get there. I found Faizul Ridzuan’s exercises and some of my dad’s advice really helpful in the process of reflection and understanding what was important for me.
  2. Take your time and do your homework. There is so much value in going slow, learning, and taking it all in so you build your knowledge and confidence in the market and the process.
  3.  ..Then go with your gut.  There’s a big caveat here. The “gut” or instinct here should not be taken lightly – it is very valuable, but even more so when you have enough information on what you are making your decision about. Malcom Gladwell talks about this in his famed book “Blink”. For someone who is very risk averse, I was surprised at how easy the decision was in the end, and I really placed value in the house just “feeling” right. If you’re going to be spending so much money on it, and may live in it one day, you better like it. A lot.
  4. Information is power. Know how much properties are transacting in your area (you can see them on Brickz.my – another top tip from my dad). Ask all the questions above, and more. Make real estate agents your friends. They are financially going to act in the interest of the seller, so you want to be able to get them on the side of making the sale. They are your best hope of critical information on the property. Knowing the state of the market means you have greater negotiating power. I was buying in a soft market, and the house I eventually bought had already been on the market for over a year (in fact, I first saw and fell in love with it a year ago, but had to walk away because I was not willing to pay the asking price). Talking to the agent, I knew no one else had even made an offer a year later. With that, I was able to get the property 15% lower than the original offer price.
  5. Location is key. I really needed to feel confident in the area I was buying in – that it was urban, booming, matured, and would likely be even in the decades to come. Analysing capital appreciation over the past 20 years was one good way of gauging this. 
House hunt 2_brickz
A very diligent real estate agent gave me a printout from Brickz.my of recent properties transacted in the Lucky Gardens area of Bangsar.

And that is it! I’m really thrilled to finally own my first property, but have been so grateful to have learned so much from this process too. My immediate goal is to try to quickly pay down the loan, while working to diversify my asset classes. 

In my next post, I’ll write out the loan process – which was unexpectedly complicated by the fact that I was no longer employed by a Malaysian company. If you are working on consultancies or a gig position, you’ll want to read this. Stay tuned! 

Do you have any lessons learnt from buying properties that you would like to share? Any questions? We’d love to hear from you!

Fast comment: How BNM’s recent announcement on interest rates affects your investments

Bank Negara Malaysia decided to lower the Overnight Policy Rate (OPR) by 25bps to 3.00 percent today. This was somewhat expected, which also prompted Mrs Money to try to renew some deposits prior to the BNM meeting.

The OPR was reduced to accommodate growth and in view of the current slowing global demand and heightened downside risks to the Malaysian economy.

I thought of listing down some areas in which the OPR change affects our personal economy.

  • Equity – lower interest rates tend to boost the stock market since it eases the funding cost for companies. The financial sector is an exception, especially banks with high net interest margin earnings which will face some pressure.
  • Mortgages – lower interest rates usually means lower mortgages for home owners. I doubt that we can expect a 25bps decrease in our mortgages but there should be a significant reduction in rates which in turn would spur activity in the real estate sector.
  • Bonds – Existing bond holdings with fixed interest rates will increase in value since the differential with the OPR will be higher.
  • Fixed deposits – banks will lower the rates for fixed deposits to reflect the lower OPR.
  • Currency – A reduction in interest rate decreases the value of the currency since its yield is lower. The MYR should depreciate in value due to the change in OPR.

For myself, the impact on equity, mortgage and bonds will have the largest effect to my assets. Therefore, I welcome this OPR reduction that will hopefully further spur my asset growth as well.

How will the OPR reduction affect you, Money Makers?

Update: EPF Dividend Announced

Hi Money-makers,

Mr Money here. I have been travelling for work across northern Europe the past two weeks and missed out on the festive CNY celebrations, and of course updating our blog.

An icy work trip

EPF announced earlier today that the dividend for FY2018 landed on 6.15%. In my opinion, a very respectable return considering the challenging end of the year for the domestic and foreign equity markets. I was expecting a return in the range of 5-5.5%. EPF has consistently performed well above their goal of returning >2.5%.

What’s next?

So I aim to evaluate this year if part of the funds in EPF should be reallocated to other investments to mitigate the concentration risk in my current portfolio. I have previously withdrawn funds from Account 2 to repay a mortgage. The avenue I am investigating now is towards equity investments in an effort to increase my portfolio returns while at the same time diversifying from the credit risk of the fund.

Stay tuned for a comparison between ASNB and other relevant funds.

Are your government-backed investments really that safe?

Hello Money makers,

Mrs Money and I have been offline during December due to us attending a destination wedding followed by a desert holiday in early December.  We returned back to Malaysia just in time for year end closing and season holidays.

mrs money at the desert
Mrs Money enjoying the incredible desert sunset

Nevertheless, we have been tracking our investments and following financial news during this period. My post today is a short comment on a subject that has been gnawing my mind since I first read about it, dealing with transparency and governance of government-linked investment funds.

The news about Tabung Haji and the alleged mismanagement of the fund surfaced in 2015 during the previous administration’s time, through a leaked document from Bank Negara that apparently questioned Tabung Haji on its financial strength.

Tabung Haji, similar to EPF and ASNB, are funds that are very popular among the mainstream Malaysian population. Although the purpose of Tabung Haji differs drastically from EPF and ASNB, its returns have been very impressive over many years resulting in many eligible investors tapping into it

Investments like this that attract mainstream retail investors (especially through government-guaranteed support) must accord the highest level of governance to maintain the trust among it’s investors and the general public. I have historically avoided funds due to their opaque structures and lack of clear understanding of where the high dividends are derived from. The problem is that most retail investors often save in these funds due to the explicit government backing and high returns these funds enjoy without delving into the details. Therefore, it is even more pertinent for these funds to emphasise strong governance, transparency and independence from political influence.

I recently decided to invest in ASNB so the news about Tabung Haji was a reminder on the importance to understand (or attempt to understand) one’s investments – even if these investments have backing from strong institutions or sovereign state. The Lehman Brothers crises and the drastic change of external credit ratings within a short period that followed is an important lesson to draw upon of how fast things can change even with investments with seemingly strong backing.

I am however still very confident in ASNB with one assurance being the fact that the person that already highlighted Tabung Haji’s issues back in 2015 was Tan Sri Zeti Akhtar, PNBs current chairperson. My hope is that PNB, under her leadership, will strengthen its governance and enhance its risk management to lift its funds reputation to even greater heights. As a Malaysian, and beyond my personal financial interest, I hope that the current administration can instill good governance and transparency across all institutions under its direct and indirect purview. As I write this, a press conference is held about MRB being shortchanged in a transaction involving EPF… sigh.

The Trust Deficit in the Financial Sector – Our First Hand Experience

Hello Money-Makers,

Mr Money here. My first post will be about a recent event Mrs Money and I encountered with regards to purchasing Amanah Saham Nasional Berhad (ASNB) fixed-price funds. Let me start with a brief introduction to myself to add some context to the events that played out.

My experience in investing in equities and interest rate products go back around a decade to when I was a university student in Europe. I dabbled in the stock market then without any prior knowledge or understanding of the markets. The consequence of this was felt in the crisis at the time and left me uninterested in equities for a long time until I started working.

Fast forward 10 years and I have now been active in the financial sector during this period and consider myself quite well versed in financial products. My experience in this sector has led me to avoid products I do not understand and allergic to high sales and management fees. I would categorize myself as a conservative investor. My target has always been 7% per year, leading to a 100% (96.7%, to be precise) increase of the principal within 10 years.

Mrs Money’s investments in the local mutual fund market was my first insight into the real costs involved in investing in mutual funds in Malaysia – although I was at the time already aware of the unusually high sales and management fees (in my opinion, this is a sector ripe for disruption). This was hard for me accept with my exposure to the financial products offered elsewhere, where index funds are often offered with next to nil management fees, and sales fees barely exist.

This brought me to highlight ASNB funds (under Permodalan Nasional Berhad) to Mrs Money. There are several fixed funds (expect a comparison of these and other comparable investments in a later post) that offer stable returns well above Malaysia Government Securities (MGS). These funds have outperformed MGS consistently – in addition to not having any form of sales or management fees, i.e. aligned with my investment criteria of stable returns with low cost.

PNB
PNB 118 under construction – soon to be Malaysia’s tallest building and home to Permodalan Nasional Berhad, a Malaysian government-linked investment company

Earlier this month, I explained to Mrs Money that I was considering moving some liquidity into these ASNB funds to diversify my holdings. After doing some research online, including forums like Lowyat.com and financial dailies, we got a tip that these highly sought after funds have very limited quotas available, but that the likelihood of obtaining units were much higher prior to a festive season (with the logic being that people would sell of some units prior to the celebrations). This prompted Mrs Money and I to quickly decide on opening ASNB accounts in view of the upcoming festive season.

The ASNB funds can be purchased over the counter at any major local bank in Malaysia. Since Mrs. Money has had an account with RHB Bank for over 15 years, we ventured into their branch in Bangsar the day before a festive holiday. The front counter immediately directed us to a personal banker. The banker started by describing the variable (as opposed to fixed) ASNB products. We were very clear in that we had no interest in purchasing variable ASNB (higher risk mutual funds) products that moreover carried management and sales fees. The variable products described to us had also underperformed the fixed products returns. The banker continued to discourage us in looking into fixed products and emphasised that the quota was full and there was zero likelihood of us obtaining any fixed products units. It was disheartening to hear that we had missed the train, so we left RHB Bank quite disappointed but also with a sense of something not being right. We felt that we should double check with Maybank’s branch in Bangsar despite the advice we just received.

While Mrs. Money waited in the car, I entered the Maybank branch in Bangsar Baru and was informed by the front counter to fill in a form and proceed to the counter (a very different approach from RHB). Once at the counter, the bank clerk processed my application and informed that there were fixed product units available and that I could go ahead and open account! I directly called Mrs Money and she parked nearby and also opened an ASNB account through Maybank.

Although we were excited, we also felt a sense of being deceived by RHB Bank. We had tried to open the same account through RHB barely 15 minutes earlier and received information on no units being available (despite no formal check of units). We would have not been able to get any units had we listened to the first advice from the personal banker at RHB Bank (who called Mrs Money two days later to follow up about our interest in purchasing variable ASNB products).

Being in the financial sector myself, I understand that banking is based on trust. This incident clearly shows the trust deficit that exists where a banker with more knowledge than the potential customer chooses to push a product with presumably higher internal incentivised bonus, over what the customer actually requests. The whole experience with RHB Bank left Mrs Money and I with a bad aftertaste. We decided to report the incident to RHB Bank’s customer complaints department before escalating it to Bank Negara if no satisfactory explanation in given.

I strongly believe that there should be greater integrity and accountability within the financial sector. This compounded with increased financial literacy amongst consumers can only benefit the investment eco-system in Malaysia.

We’ll keep you posted on their response. In the meantime:

Do any of you have any negative (or positive) experiences with financial advisors to share?