Overheard at a restaurant: “Rents are so low now that I should just sell the place. Even FD (fixed deposit income) would be higher.”
That same thought crossed my mind when a friend lamented how rental incomes are falling and how returns are negative after taking into account maintenance costs as well as the cost of cleaning and refurbishing when tenants move out.
Would I continue to accept rental income if I could get a higher yield by selling the property and putting that money in FD, even at 1.75% to 2%? The Employees Provident Fund guarantees a dividend of 2.5% a year and can probably still pay about 4% per annum, going by its track record, if I don’t mind withdrawing my funds only after age 55. Potentially higher returns elsewhere would involve taking on higher risks.
At least one friend has begun contemplating the sale of a property after the developer’s guaranteed yield period expires, if the sale price would enable him to cover his costs. Incidentally, this friend had used the cash rebate offered by the developer as well as the savings from the blanket loan moratorium last year to invest in the stock market to make up for the lack of rental income from another studio unit left empty amid the pandemic. He isn’t the only friend I know who has had trouble finding a tenant since Covid-19 struck, and at least one of them had been accepting rent that did not cover the monthly mortgage well before last year.
Another friend — among the minority who have continued to resist owning property despite receiving an earful over how they are only helping others pay off their mortgage by renting — does have a point when she says she would not be able to enjoy other things in life if she had chosen to buy instead of rent.
My friend’s landlord would get about RM2,552 a month — similar to the rent my friend pays — if he or she sells the property at an established neighbourhood in the Klang Valley for RM1.75 million at the current low FD rate of 1.75%. If my friend had chosen to buy, her monthly mortgage would have been at least double the rent, even if the property cost only RM1 million (RM5,800 over 20 years with some RM392,000 paid in interest alone at a low rate of 3.5% per annum).
The monthly mortgage for the property she has been living in for years would have been around RM8,728 — more than triple the rent she is paying — if she had taken a RM1.5 million 20-year mortgage at a rate of 3.5%, which would have pushed the cost of the RM1.75 million property up to RM2.1 million because she would have paid RM590,000 in interest over the 20 years.
The RM590,000 interest cost for the home loan alone would be enough to cover rent for 19 years if my friend continues to rent the same place at RM2,552 a month, a simple back-of-the-envelope calculation shows.
If she diligently stashed away at least RM2,552 a month — a third of the amount she would have paid for the mortgage — she would have accumulated about RM340,000 over 10 years and easily RM750,000 over 20 years even at a 2% return per annum, thanks to compounding interest. The remaining one-third difference could yield different benefits, depending on what it is spent on: education, vacations or the finer things in life.
There are merits to home ownership and not everyone wants to live in neighbourhoods where property prices are north of RM1 million. Yet, if real estate prices continue to stay elevated and rents do not budge from their lows due to an oversupply, renting can actually work for those who know how to manage their finances well.
That does not mean it is no longer important for policymakers to make sure there is enough supply of affordable housing. That some conventional wisdom may no longer apply in the world of elevated asset prices and ultra-low yields, however, means that policymakers need to put more thought into education and creating awareness of financial planning.
I wonder if the person at the next table chose to sell his property. What would you do if you were him?