By Jonathan Roberts (email@example.com)
“Buy your first home as soon as possible, do not wait until it is too late” is an advice we commonly receive from well-meaning elderlies. The notion that renters are poised to lose out for not owning a property is hardly unusual.
But as property prices continue to rise faster than our income levels, renting may be the only option for many, especially for the younger generation. Recognising this, StarProperty.my spoke to verylongrun.com founder and independent certified financial planner, Julian Ng who holds the view that renters can achieve the same wealth level as property owners if they play their cards rights.
Below is the full transcription of the interview:
Q: Some notable property experts and economists have openly stated that the influx of huge investments by other countries into Malaysia is slated to radically drive property prices upwards. One even said Malaysia will be like HK within the next five years. As such, people who can afford to buy cannot wait any longer or they will miss the boat entirely. What are your thoughts?
Julian Ng: If you have tens of millions of dollars in assets, you can take your pick of getting advice from any of the property experts around town. If you don’t, you should probably focus on the long-term, I’m talking decades, and have a diversified investment portfolio.
I think investing in a regional or global equity portfolio over the long term won’t do worse than a long shot bet on Malaysia becoming like Hong Kong. What do you think will drive up prices of Malaysian property if not for the same consumption and investing themes that drive up stocks even more?
What I can say is that over the long term, the property is generally a safer asset than stocks, and therefore would give lower returns than stocks. So invest according to how much risk you can stomach. Even if the Hong Kong factor materialises, no one knows whether it can sustain.
Q: Should everyone who can afford a property around the “affordable range” of RM500,000 invest in one to be on the safe side or people should never invest out of the fear of missing out?
JN: I would never say never. This is more a personal finance question rather than an investing one. Living with family can be very meaningful, or not… if they stress you out. So this becomes a question of whether you want to or not, regardless of whether you have the money.
From a purely investing viewpoint, you can be asset-rich by renting cheaply and investing the rest of your funds that would have otherwise gone into buying a property. These days, there are online investing platforms that make it very much easier for people to invest like they were billionaires, but with very small sums of monies. So you can replicate the returns of property, stocks or any asset class quite easily by buying into low-cost funds.
Q: Some people see renting a home as burning money because you do not end up with an asset as compared to buying a home. How would you counter this assertion?
JN: This assertion puzzles me because it ignores the fact that renters can also invest. Owners do get a return boost because they put up very little capital, borrow the rest and end up owning a high-value asset at the end of a few decades.
The interest portion of the mortgage also reduces over time while renters face inflating rentals, though in reality, rental yields haven’t been too exorbitant. However, this ignores the owners’ loss of short term financial flexibility.
Of course, there are many issues to consider in the buy versus rent decision, for example, whether you have enough money in the short term or whether you want to go through the hardships of borrowing. Suffice to say, both buyers and renters can be asset-rich by investing.
I have worked out some numbers in the following tables. Say you put a 10% downpayment for a 20-year home loan to buy an RM500,000 property, your monthly installment at 4% interest is about RM2,700. Your home value in 20 years time would be as follows:
But you don’t have RM50k today for a downpayment. So, assuming you rent for RM1,000 a month and invest the remainder of RM1,700 that would have otherwise gone to instalment payments into a high risk, higher return portfolio because your youthful risk-profile allows it, your asset value in 20 years time would be:
Q: The rent-for-life culture has become quite prevalent in the West. Renting gives young people the flexibility to move from one state to another for job opportunities. Renting also allows one reduce travel time and expenses by living closer to the office. However, when you reach retirement, is there a risk of NOT owning a home should: a) you don’t have assets/savings b) you can no longer generate income?
JN: Renting frees you from a lifetime of debt. If you agree with the liberating minimalist philosophy that’s so trendy these days, renting is for you. If you can safely assume that there’ll forever be places to rent in the world, what exactly is the risk of not owning a home?
As for the question of not having assets, please refer to my earlier calculations. In fact, I dare say that the renter-investor can be more ‘liquid’ than the property owner who is faced with the challenge of monetising his property to fund retirement.
Q: Do you foresee younger Malaysians adopting the rent-for-life culture? If more people choose to rent instead of buying, would the property market suffer?
JN: I think it’s possible to rent for life but it would require a total philosophical, cultural and lifestyle change.
Many people want a big house for vanity reasons. If enough people see past that, the renting culture would be more lauded. More renting may also be good for the property market because it gives the asset class more rental income.
Q: What are the pros of renting instead of owning a home?
JN: Renters will have more financial flexibility because they can invest in a more diversified portfolio rather than putting all their eggs into one property.They’ll have more mobility to find the perfect location. Because they’re not indebted, they can think of other life aspirations rather than working just to pay off the mortgage. But renters face inflating rentals over time, which they can counter with rising incomes, lifestyle changes or investments top-up. The other risk (a small one I would say) is getting kicked out by the landlord if they want the property back. A renter would also be restricted in renovating the property.
Q: What are the pros of owning rather than renting?
JN: By owning you’re making an actual investment with the help of the bank which can give you decent long term returns. Your interest portion keeps reducing while your property keeps appreciating. You have the freedom to renovate and realise your design aspirations.
No one can kick you out! But you are tied to a loan repayment schedule which reduces your freedom of movement from, say, a job. There’s also a risk that you are putting your life savings into a bad development, resulting in financial losses and heartaches.
Q: Is the market right now in favour of buying or renting?
JN: I would ignore market timing in big life decisions. If you’re not a property speculator, buy if you can afford it, rent if you can’t or don’t want to buy. But whether you’re owning or renting, do make sure you save or invest as much as you can according to risks you can stomach.