“.. boy, the first thing you should buy is a home!”
“.. why are you not staying in your own property?”
“.. son, this is your 2nd property. Why do you still choose to rent? Is it not a waste of money?”
Hi, I’m Paul and the above conversations are synonymous with my situation, my approach to renting instead of living in my own property. I get the question a lot from my parents, my peers, even the property agent who is out and about looking for my next rental space.
For better context, I am a property investor with a number of residential properties to my name. Yet, I choose to rent instead of moving into my own property.
Is renting not a waste of money?
Generally, renting is not a waste of money if the place you are renting allows you to save money for investment purposes. In fact, it is my stepping stone to financial freedom. If you are just out of college, it can be difficult to finance a home when you have education debt to pay for. Renting cheaply allows you to save up and to advantage of a good investment opportunity that might come your way.
Personally, I choose to rent instead of living in my own property. This is because, in my situation, renting is cheaper than my monthly mortgage instalments. The rent I collect from my properties is higher than the rent I pay and the extra money allows me to save up and reinvest into better investment opportunities.
To give you a simplified example of my situation, monthly cash flow movement,
- Mortgage commitment to the bank : RM 2,600
- Property maintenance cost : RM 200
- Rent collected from property (to me) : RM 2,800
- Rent paid for rented space (to landlord) : RM 2,000
- Monthly cash flow : Collected rent – ( Mortgage instalment + Maintenance ) – Rent paid
Monthly cash flow : RM 2,800 – ( RM 2,600 + RM 200 ) – RM 2,000
Giving me a net negative : RM 2,000
In a reverse situation where I choose to stay in the purchased property, instead of renting it out while I myself rent a cheaper property, this will be the monthly cash flow movement,
- Mortgage commitment to the bank : RM 2,600
- Property maintenance cost : RM 200
- Rent collected from property (to me) : RM 0
- Rent paid for rented space (to landlord) : RM 0
- Monthly cash flow : Collected rent – ( Mortgage instalment + Maintenance ) – Rent paid
Monthly cash flow : RM 0 – ( RM 2,600 + RM 200 ) – RM 0
Giving me a net negative : RM 2,800
** I am essentially paying an additional RM 800 per month to stay in my own property.
If you consider the monthly net cash flow in both situations, renting while renting out my property cost me less every month. I get to save an additional RM 800 every month, reinvesting it to other investment vehicles. All this with my own property, to my name, waiting on time for the capital appreciation.
When do I consider moving into my own property?
To me, there is 2 main litmus test to identify if I should stop renting and move into a place I call my own.
- What does my family need?
- How much can I save between renting and buying to stay?
Litmus Test 1 : What does my family need?
In my current situation, it is only my wife and me – we only need 2 bedrooms with a comfortably sized living room. We decided renting is better because it is cheaper and it gives us quite a bit of flexibility to try out different locations.
However, we do foresee in the next 5 years, the family will get bigger with a few kids and stability becomes crucial. No longer do we pride ourselves as nomadic. Instead, we will embrace stability and plant our roots in a home that fits our needs.
Eventually, a bigger family will warrant the need for a bigger space – landed home / bigger condominium unit. At that time, it may make better financial sense to buy and stay, finally settling down in our own property.
Litmus Test 2 : Can I still save by renting?
How much saving is justifiable for you to rent depends from individual to individual. For my situation, being able to save an additional RM 800 per month is a considerable sum especially when the saving is close to 15% of my take-home salary.
This also means having an additional 15% every month, put away into an index fund that appreciates passively every month.
However, if you renting only saves you a small amount of RM 100 or 4% – 5%, you might be better off moving into your own place. Staying in your own place is a prideful feeling, being able to own a place you call home. It also comes with freedom and convenience that is not found in a rented place.
Like it or not, renting does come with its advantages and disadvantages.
What I like about renting
The below comparison of advantages and disadvantages is written for individuals who are undecided if they want to rent or buy a property to stay in. It is also with the assumption that not everyone can afford to buy their second home quickly and will need to sell the house before moving.
If you have the same thought process as I do, invest in property, rent them out while renting yourself, I believe you will inherit the advantages and disadvantages of both renting and buying. Cheers!
#1 The flexibility to move
If your career requires you to move every few years, then renting is a great option! In most cases, you will be locked in with a commitment for 1 or 2 years. Plus, if you need to terminate the tenancy agreement earlier, all you do is lose the deposit and you are free to move.
In some cases, you find yourself disliking the location and you need a better environment, renting allows you to do so very quickly and conveniently.
In contrast, the process of moving out of your own house can be time-consuming and a hassle. If you need to rent out the property in order to move, a lot of work is needed to clean the place, uplift and have it finally ready to rent. Next, you will need to engage property agents to have it listed and to go through the entire process of viewing, negotiating and closing the deal. Imagine doing all this in the midst of moving yourself.
If flexibility is a necessity in your current situation, renting can be a good option for you.
#2 Less responsibility
When you rent the property, the landlord is responsible for any maintenance and repairs that happen. If you have a pipe burst, the landlord will need to get the burst pipes replaced and make the necessary arrangements for the tenant.
In other words, all you need to do as the tenant is to notify the landlord to get the burst pipe fixed and go about your day as usual. There is no need of finding a repairman, getting quotations and comparing prices. All you need to do is to advise an appropriate schedule for the repairman.
However, if a breakdown happens because of the tenant’s negligence, the responsibility to repair falls on the tenant.
Taking as an example, quarterly air-conditioner maintenance is the tenant’s responsibility. If the air-conditioner is to break down because the tenant failed to maintain it every quarter, then the tenant is responsible for getting it fixed.
#3 More savings for better investment
In some cases, renting can help you save better every month. This means having more money to pay off the student debt that is weighing you down or have it invested in the index fund.
If your situation is like mine, renting out my own place also allowed me to buy my 2nd property quickly. From the bank’s perspective, my first property is generating rental income and I was deemed earning more. This improved my debt-to-service ratio and allowed me to borrow more from the bank to finance my second property.
Personally, saving RM 800 every month have added to my growing index fund portfolio. If I had stayed in the property I purchased, I would have invested RM 8,000 less every year which translates into RM 400,000 in 20 years, with 8% annual interest.
What I dislike about renting
#1 Terrible landlords
Admittedly, there are a lot of terrible landlords who will keep you hanging on a repair or maintenance. In some cases, there are also landlords who are just forever unreachable. The only time you can reach them is when you need to pay rent, beyond that, their line is either busy or offline.
#2 Rents will go up
Even if you found yourself an excellent deal, a good 20% below average rental rate, the rent will not stay the same forever. If the location is highly desirable, rising property prices and inflation will definitely cause your rent to go up.
When the rent rate no longer makes financial sense, it is time to move again.
Doing this for the first few years with my wife is not that big a deal. However, having to juggle moving house while taking care of 2 young kids is a hassle not many wants to go through.
#3 There is no tax advantage
Many of the cost of owning a property is tax-deductible – property tax and mortgage interest. Even the homeowner insurance can be deducted from your tax filing in most cases.
However, if you are renting a space, there is no expense that is tax-deductible. If you are thinking about insurance, renter’s insurance is not deductible and it does cost quite a bit.
#4 Less freedom to renovate
If you want to renovate the property, you need the landlord’s permission. Even if an additional room to the house adds more value, if the landlord decides it is not for him, it will not happen.
At the same time, you will also be thinking twice before sinking any renovation cost into a property that is not yours. It just does not make sense to be renovating a property, sinking a substantial capital cost with no chance of making it back. Ultimately, the property belongs to the landlord and he profits from your renovation.
When Should I Buy a Home?
I believe it is everyone’s dream to finally own a place you call your own. It is the American dream, Australian dream, Malaysian dream, and so on. There is no doubt that having your own crib comes with satisfaction and pride but it also comes with a lot of unexpected costs – property taxes, maintenance and insurance.
Hence, you need to absolutely sure you can afford a home before buying it.
Below are questions that I used as my guide when I was still deciding on my very first property.
#1 Do I have any debt?
If you have a student loan that is taking 10% – 20% out of your monthly salary, you might want to think twice about having a mortgage loan.
This is true especially when the student loan is charged at a higher interest than the mortgage loan. If you are not careful, late payments on the student loan can cause it to bloat infinitely, making the journey to financial freedom a lot tougher and longer.
#2 Do you have at least 6 months of emergency fund?
This was the toughest part for me because it took me slightly more than 1 year to save up 6 months’ worth of emergency funds.
Having said that, this is also extremely important in your financial journey. If you are made redundant today, how long can you pay for the monthly mortgage without a job? If you are consistently late on your monthly instalment, you will quickly realise how brutal and merciless banks can be.
#3 Do you have enough cash for a 20% down payment?
There are costs to buying a home – down payment and purchase fees. If you have enough cash for a 20% down payment, you will find yourself in a very comfortable position to cover the 10% down payment, 5% legal fees and an additional 5% for furniture and simple renovation.
#4 Are you emotionally ready to settle down?
Buying your first property is a big deal and no one can tell you otherwise. However, not everyone is ready to commit to such a responsibility.
Ask yourself, are you ready to buy a home, now?
Final Word
Renting is my way of making sense financially. It allows me to save more every month which is then reinvested into other investment vehicles.
For some, renting is not an option worth considering and I appreciate that. The same solution may not work the same for you and me.
Until then, take care.
