Here are some mathematical principles, as well as other less empirical methods, of determining if now would be a good time to rent or buy.
by imoney.my
When it comes to a home (i.e. a property you personally stay in), renting versus buying is literally one of the toughest decisions you’ll ever face.
On the one hand, you have probably been brought up, like millions of other Malaysians, to embrace the “never rent” principle, because renting means "helping others pay for their homes". On the other, you could be struggling to convince yourself to spend your hard-earned savings on a property, because you feel you aren’t ready to shoulder the responsibility of being a home owner.
For those who have done your cost comparison between buying and selling and still can’t come to a final decision, here are some common approaches and factors that might help you make that all-important decision.
Conventional mathematical approach
Many property experts, especially those based in the US, use a calculation known as price-to-rent ratio. Just find the average list price using property websites like StarProperty.my then divide that price by rent per year.
Eg: Say the average list price of the property is RM500,000 and rental is RM24,000 every year. The Price-to-Rent Ratio would be 500,000 ÷ 24,000 = 20.83. Interpreted roughly, this means that if you rented this house for 21 years, you would be able to own it by the end of that time.
To use this method to determine if buying or renting is a more attractive proposition, you can consider two guides:
- According to online real estate website www.trulia.com, price-to-rent ratios that are 15 and under indicate buying as being “less expensive” than renting, whilst Price-to-Rent Ratios that are 20 and above indicate renting as “less expensive” than buying. Hence, for a property with a Price-to-Rent Ratio of 20.83, renting is seen as a more attractive proposition than buying.
- According to www.numbeo.com, a website conceived to calculate global cost of living, Malaysia’s Price-to-Rent Ratios are 16.41 (within city centre) and 24.01 (outside city centre) respectively. For a property outside the city centre with a Price-to-Rent Ratio of 20.83, you’re under the national outside city centre Price-to-Rent Ratio of 24.01, which makes buying more attractive.
Because there isn’t any globally-recognized “golden formula” in using price-to-rent ratios, you could refer to Trulia’s holistic approach, or use Numbeo’s statistics as a guideline. But generally, it is commonly agreed that it would be better to buy if your Price-to-Rent Ratio is lower, and to rent if it is higher.
However, in view that price-to-rent ratios do not factor in other considerations such as the cost of buying and renting, the time you intend to stay in a property, and of course, your personal preference; it is mostly used as a generic guide or not as the key deciding factor.
The Time Factor
You may not think so, but time is a factor when deciding between renting and buying, and an important one at that.
Generally, if you plan to stay in a place for just a few short years, buying it may not be a good idea because of the following factors:
- Every time you buy or sell a property, you’ll incur transactional costs in the forms of legal fees and other related charges. The amount can easily go into five figures.
- If you sell within five years in Malaysia, you’ll need to pay Real Property Gain Tax (RPGT). As of July 2013, RPGT is 15% of your net gain for the first two years and 10% for the next three years.
- Additionally, you would also have paid a sizable amount for renovations when you first moved in.
- Lastly, in the few years you have been staying in your home, you would have serviced substantial amount of interest for your home loan.
All the above can erode whatever earnings you would make from the appreciation in value of your property if you decide to sell it too early.
You could, of course, opt to rent it out and hope that the rental suffices in paying off your monthly loan instalment. But this involves risk on your part. If you can’t manage to rent the house out or can only rent it out at 50% of your monthly loan instalment, you’ll need to service the rest of your loan commitment out of your own pocket. This could severely affect your lifestyle or hinder your chances of buying another property.
As a general rule of thumb, experts recommend that you stay in a home long enough to allow appreciation in property value to overcome the transactional costs. This can be up to five years or more, or much shorter in times of a property boom. But if you’re not so sure about your long-term living arrangement and you’re not financially stable enough to be able to service the monthly repayment, renting might be the safer option for now.
Renting VS Buying – The Personal Preference Factor
All the “non-emotional” elements (such as affordability and time) aside, it’s a good idea to put your personal preference into the equation when it comes to the battle between renting and buying.
Some people thrive on changes and like the idea of moving to a new environment every year or so. For some, it may not even be a matter of personal preference but a matter of being in a highly mobile job. If you fall under this demographic, renting could be the preferred housing solution compared to buying.
Then there are those at the exact opposite end of the spectrum – people who enjoy living a structured lifestyle, or have fallen in love with a specific location knowing for certain they’d never leave again (at least not in the short term). In this case, buying a home certainly makes a lot more sense than renting.
Additionally, some people need to enjoy the freedom of changing wall colours every season, hanging paintings wherever they fancy and building DIY contraptions in every corner of the house – which you can do only if you own the place. But for those who rent, they enjoy freedom of another kind – the freedom of not being tied down, of being able to move if they don’t like the place as soon as the rental agreement expires.
Seasoned property investors may argue that even if you don’t live in it, a home is going earn you rental and appreciate in value over time – which makes buying not just the preferred choice, but the only logical choice, when it comes to a home. But not all investors are built the same: there will always be those who would much rather put their money in higher-risk assets (such as stocks) or lower risk assets (such as cash) instead of a home. This, of course, still boils down to personal preference.
Unlike calculations and costs, personal preference is intangible. It is what makes people do what they do whilst others might do otherwise. Say your mind is screaming “rent” when the logical choice is to “buy”, it might be worth your while to listen to that inner voice. Because if you end up hating the place after living in it for one year, you may find that selling it and earning your capital back may not be so easy.
RENT or BUY – Your Call
Like most things in life, buying or renting is a question that cannot be answered by anyone else other than yourself. While you cannot make a 100% correct decision, you could consider these tips to help you along the way:
- First and foremost, consider your financial position. If the monthly instalment from buying a house leaves you with barely enough to survive, you should probably consider another option that lowers your commitment – be it buying a cheaper property or just renting one for now. You can find out instalment costs from calculators such as this one provided by imoney.
- Ask yourself how long you plan to stay. If you plan to stay at a place for life, buying is a wise option if you can afford to. But if you plan to move out in a year or two and do not actually have plans to invest in properties, renting might be the better choice.
- Consider your personal preference. Ask yourself if you’re happy with the place. Think about the implications of having a permanent home and whether you can cope with it. If you’re taking a loan, ask yourself if you are ready and willing to sacrifice certain elements of your lifestyle to pay for a home for the next few decades.
- To help reinforce your decision, you may also wish to calculate the price-to-rent ratio of the property, just to see where it stands.
This article is brought to you by www.iMoney.my, a comparison website for financial products dedicated to helping Malaysians make the best use of their money.
