Which is a better choice – to buy a new property or a sub-sale property?

Dear Peter Yee,

I am interested to own an affordable double-storey link house in the Klang Valley. Currently, I am 30 years old and due to the fact where I only have limited savings, I can only afford to buy properties that are priced from RM200k to RM300K.

As current property prices have gone up so high and for this price range, I would only be able to get those new double-storey houses that are located further away from the city centre - which is inconvenient for my elderly parents. But, the consolation is the upfront savings required would only be around RM30k to RM35K.

I am also open to sub-sale properties which are priced around this range, but too bad, not only is the house condition bad, the prices have also gone unreasonably high. A simple refurbishment will easily take up another RM50k to RM60K. This would mean that the total upfront payment required would be RM35K + RM50K = RM85K or more! Now, even the poorest condition houses in Klang Valley are also sold at unreasonable high prices and even the banks would not value the old house at such a high price.

I am worried that if I do not buy the sub-sale property now, the price would soar even higher in the next 6 months. With the given situation, can you please advise me on what should I do now?

Should I buy a new or sub-sale property? Should I buy now or wait for the price to stabilise again?

Regards,
Worried Lady

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Dear Worried Lady,

Your concern about the escalating prices is shared amongst many people in the market. The aggregate of worried people rushing to purchase properties may explain why property prices have escalated above the affordable level of most ordinary people. This kind of market is called a “Seller's Market” otherwise known as the best time for people who own property to sell their property for a good price as there are more buyers seeking for property. The fact is the property prices can fluctuate. Like the stock market, it goes through cycles as well. In general, the prices of properties have already appreciated approximately 20% to 30% over the past two years, and the upside for capital appreciation may be limited.

For your case, you are young and mentioned that you can only afford properties in the range of RM200,000 to RM300,000. From the information provided, we assume that you have savings of about RM30,000 as down payment, may be single, living with your parents and renting the current home you are living in. We understand that you are also a filial and caring daughter to your elderly parents. In money management, the priority and focus should be on the people aspect and then only on things. Buying a property is only a thing used to support and improve the quality of life for the people. In this case, purchasing a home is meant to support you and your parents.

If you are buying your own home, you are then your own tenant for the property and the considerations would be different. There are 2 options for you to consider:
If you can find affordable secondary property near your workplace, you may buy now.

Option 1. If you buy a landed residential property within your affordable range from the primary market (from developers), from you should consider buying only from reputable developers to ensure that the project is not abandoned. You also need to factor in the transaction cost and furnishing cost. Other considerations include travelling time, petrol and toll charges and inconvenience to your parents as it may be far from their family and friends. These other factors will affect your time and life. Option 1 may not be the best choice.

Option 2. Buy from the secondary market either from the sub sale or auction market within your affordable price range. For a secondary market residential property, you may need to budget and consider property repair costs, transaction costs such as legal fees, loan agreement fees and stamp duty. Your concern is if you do not buy now, prices will continue to increase after 6 months. No one can predict the future. For example: what happens if the stock market suddenly turns south? Or unemployment rate increase? Or the scenario whereby for those who have already bought property at higher prices and if banks raise interest rates, they will are unable to pay the monthly repayment to the banks for more than 3-6 months. The banks may then auction their properties until sell it at a much lower price than the market price.

I suggest that you select your target area and its surrounding area. Research and view the properties. By doing so, you will be able to identify bargain opportunities from motivated sellers. If you can find affordable secondary property near your workplace, you may buy now. If not, you may consider renting first until you find the right property. In the mean time you can also focus on increasing your savings and invest in yourself such as learning how to identify good investment grade properties. My view is that Option 2 is better than Option 1.

If you are purchasing the property as an investor, you should consider the value of the property measured by its yield (how much rental the owner can collect) and potential capital gain (difference between buying price and price if one were to sell the property at that point of time).

The gross yield is equal to (rental collected per month X 12 months/ divided by the purchase price) X 100%. For example, the purchase price of a double storey link house is RM400,000 and the monthly rental is RM800.The current average cost of borrowing is approximately 5%. When the cost of borrowing (5%) is higher than the calculated yield (2.4%), then purchasing the property as an investment would be considered as a liability.
The gross yield is calculated as (RM800 X 12 = RM9,600/ divided by RM400,000) = 0.024 X 100% = 2.4% yield.

On the other hand, if you can find property below market price having gross yield more than twice bank’s fixed deposit rate and has good potential for capital gain, then you may consider buying.

Currently, residential property purchaser/investor should consider below market price secondary property in a high occupancy area and avoid overly priced property and those far away from town.

For your case, you may consider opting for a sub-sale property as it is more certain than buying a house from a developer. Start learning and searching for the house in your target area until you find the right one.

Wishing you all the best in locating your property

When you Don't GIVE UP, YOU CANNOT FAIL!