A first-timer’s guide to buying residential property
Published on: Sunday, September 25, 2022
By: Ian Tai, FMT
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Buying your first property is a major investment, so it’s important to keep the following tips in mind. (Envato Elements pix)
Are you in your late 20s or early 30s and are thinking of purchasing your first property? It’s a major investment, and the last thing you’d want to do is mess it up.

Unfortunately, making mistakes is very common among young property buyers, potentially leading to a loss of five figures or more in personal net worth. So, how do you prevent this?

If you are a potential first-time property owner, here are five considerations to keep in mind.

1. Know why you are buying real estate

Are you purchasing a home to reside in or as an investment? Do you intend for your parents or siblings to live with you, or will you live alone? Will you keep it for rental income, or flip it for fast gains?

It’s important to know the answers to these questions, as they affect decisions such as the location and size of the property.

That said, most people do not know what they truly want until much later in life, so it’s OK to delay the purchase until you are certain. Instead, aim to build your finances until you can figure out your plans definitively.

2. Realise that needs and wants change

People’s needs and wants change every three to five years. You might fall in love and choose to get married. If you bought a home as a single person, the property might not be suitable once you factor your partner into the equation. Furthermore, circumstances will shift once you have children.

Other possibilities include a career switch, migration, or business venture, all of which will affect your priorities and financial status. This, in turn, impacts the type of property you should own.

Recognise that your needs and desires will evolve over time, and consider property that allows you to be flexible with your options.

3. Keep your debt-service ratio (DSR) low

If you earn RM8,000 a month and have debts to the tune of RM2,000 monthly, then your DSR is 25%. These liabilities might include mortgages, hire-purchases, study and personal loans, as well as credit card debts.

You will want to keep your DSR at the optimal level of 30%, which is RM2,400 a month if you earn the amount above. Any larger and you put yourself at risk of financial stress.

You might ask: “What if I earn RM8,000 a month and have a car loan of RM1,000? Does it mean my maximum mortgage repayment should be RM1,400?”

Ideally, yes. With a loan repayment amount of RM1,400, your mortgage should come up to about RM340,000, which allows you to aim for a home that costs about RM380,000. Those priced upward of RM400,000 would be out of reach for you at this time.

Blue skies will be on the horizon if you are able to identify the property that takes into account your needs, wants, and income level. (FMT)

4. Understand property valuation

Property valuation is key to avoid buying overpriced properties, which could lead to significant losses in your personal net worth. One of the easiest ways to value a property is to calculate its price per square foot (psf), and compare this figure against similar properties in the vicinity.

For instance, if you’re considering a 1,000-sq-ft condo in town X priced at RM500,000, its valuation is RM500 psf. If most units in the neighbourhood are priced at a similar range of RM520-550 psf, then this might be a good deal, depending on the condition of the unit.

Now, assume you’ve identified three other condos with the following valuations:
  • condo 1: RM450-480 psf
  • condo 2: RM600-650 psf
  • condo 3: RM1,000-1,100 psf

Ask the following:
  • Will condos in town X appreciate to RM1,000 psf in the future? If no, then condo 3 is overpriced.
  • Why is condo 1 priced the lowest? Is it because of poor maintenance, or a less-strategic location? If the fundamentals of condo 1 are solid, then compare your intended unit with condo 1 to find the best deal.
  • Why is condo 2 priced a little higher? Again, “comparison shopping” will help you make the best decision as to which unit you should buy.

5. Identify locations with income growth

This is important if you want to attain capital growth from your property. Smart homebuyers will want to find out the main economic activities of residents in the location, and have an estimate of the population’s monthly income and spending behaviours.

Let’s say the people of town Y consists of middle-income earners who make about RM5,000 a month. They drive affordable cars and live a modest lifestyle. Then you find a 800-sq-ft property priced at RM800,000 (RM1,000 psf).

Would you buy this house and expect it to appreciate in the future? In all likelihood, no.

Now assume a similar house located in town Z, which has a growing population whose monthly income is RM10,000 and rising. In this case, the RM800,000 property has the potential to rise in value, making it worthy of consideration.

By following these tips, you are likely to make fewer mistakes when the time comes for you to purchase your first property. Good luck!

This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.

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