Rental Vs. Home ownership

Someone on Facebook stated that Real Estate is no longer a good form of investment and renting is better than home ownership. My personal opinion will always be that ‘One should not rent unless you have your own property that pays your rent’. I wanted share my theory on Rental Vs. Home Ownership.On this video I also share why I suggest that, if you are renting now and do not own your own property why you should consider purchasing a property.

To prove my theory I took 4 assumptions into consideration (If you are too lazy to read this, check out the video at the end of this post).

  1. New Property price
    • I picked up 6 new developments within the Klang Valley with a property price that is below RM500,000.00
    • From the 6 properties selected 3 of them were below RM 400,000.00 and another 3 were above RM 400,000.00
    • So I used RM 400,000.00 as my benchmark for the theory.
  2. Cost to rent.
    • I went on to find some properties in the rental market which matches the new development market.
    • I found the cheapest average property cost was at RM 1,300 so I took RM 1,300 as our rental benchmark.
  3. Appreciation Rate
    • To get the average appreciation value I did a comparison between the developers selling and the most recently advertised price of the property.
    • I found that almost all properties are able to give an average of more than 5% appreciation value every year.
    • But to prove a point I prepared 2 simulations (the charts below) on the theory
      1. The property appreciates at 1% every year.
      2. The property appreciates at 5% every year.
  4. Bank Interest Rate.
    • Banks interest rates at this time varies between 3% and 5%.
    • So I chose a bank offering a housing loan at 4.45% per annum.
    • The monthly installment for a RM 400,000 property was RM 1813.39.
      • This would mean that the monthly commitment (fixed monthly Investment) increased by RM 513.39 .
        • RM 1813.39 for the housing loan – RM 1300 for rental
        • I removed rental as part of increased monthly because, no matter where you live you need to pay for shelter.

With the the assumptions I came up with this 2 charts showing that you could get a return of over 250% (in a good location) or at least 40%. With rental on the other hand you are just paying your landlords installment.

  • Chart showing ROI at point of sale with a 5% appreciation value. YoY
  • Chart showing ROI at point of sale with a 1% appreciation value. YoY

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