Case Study: Property Investment No.1

 

My first property purchase, which was also my biggest investment at that time, was a home for my family.

It was in August of 2009 which was around 15.5 years ago.

The property is a newly launched double storey semi-detached (DSSD) house in a gated community bought at a price of RM348,000 directly from property developer.

I was lucky because at that time the property boom was just about to start.

The selling price of new similar properties in the vicinity increased rapidly, in which new launches were snapped up like buying vegetables in the market.

At the time when I moved into my new house in the fourth quarter of 2012, the market value was already close to RM500,000.

Currently the launching price of new smaller size DSSD in the same area is well above RM700,000.

I took 90% house loan from a local bank at interest rate of BLR-2.3% with 20 years tenure.

At that time I already planned to go into property investment. Probably I should have opted for the longest loan tenure in order to pay less in my monthly instalment.

However, I did not want to pay too much interest to the bank for this property meant for own occupation.

Thus, I chose the middle pathway, which was 20 years with only 15 years of MRTA coverage.

Initially I just paid the fixed instalment monthly under standing instruction in order to save more cash for subsequent property investment.

During MCO time in 2020, I started to pay extra every month to save on the interest.

Finally in Aug24, after about 15 years serving the loan, I have fully settled it 5 years earlier than scheduled.

OK, I settled it earlier, I thought I should have saved a bit on the interest. However, to my astonishment, this wasn't the case.

I took RM317,100 loan from the bank, including MRTA. In my loan agreement, it was clearly stated that I need to pay RM1,322 for the first 12 months, and subsequently RM1,773 monthly for 228 months.

It all added up to be RM420,108. This means the overall interest that I have to pay is RM103,008.

The BLR fluctuated in the past 15 years. Once in a while I received notice from the bank telling me that the rise or drop in BLR has resulted in the change in my instalment amount, but every time my instalment figure was kept unchanged because the change was less than RM50.

As I paid off my loan earlier by 5 years, I still expect to save some interest, even though the interest was incurred the most during the earlier stage of loan repayment.

After calculation, I was surprised to find out that the total amount of instalment that I have already paid to the bank was RM433,674, higher than the RM420,108 stated in my loan agreement!

This means the total interest paid was RM116,574 in 15 years, higher than RM103,008 in 20 years stated in the loan agreement.

IF I didn't pay extra since 2020 and kept paying RM1,773 per month until the end, I don't think I can pay off in 20 years time and the interest incurred in the end will be much higher.

There might be one issue that possibly gave rise to such discrepancy.

When I signed the loan agreement, the BLR was at 5.55% which was clearly stated in the agreement. 

If I use online home loan calculator to calculate the instalment, with interest rate of 3.25% (BLR 5.55 - 2.3%), the total amount of instalment that I should pay in 20 years is RM431,760.

However, the total amount of instalment stated in the loan agreement was RM420,108, which is based on interest rate of only 2.95% when I calculate backwards.

Furthermore, there was a 9 months gap between the time I signed the loan agreement and my first instalment.

When I paid my first instalment in the second half of 2010, the BLR has already risen to 6.27%.

It was a significant 0.72% increase in interest rate but the amount of my monthly instalment was not increased accordingly.

Based on interest rate of 3.97% (BLR 6.27 - 2.3%), my monthly instalment should be at least RM1,900+, not RM1,773 I paid regularly.

This may have caused me to pay less than it should be by RM150 every month.

From 2010, the BLR kept increasing steadily to 6.53% in 2011, 6.85% in 2014 & 6.97% in 2018, before retreated to 5.47% in 2020.

All those years my monthly instalment was kept unchanged by the bank.

Perhaps my monthly instalment amount should have been higher from the very beginning, but I'm not 100% sure if this has resulted in higher interest paid to the bank in the end.

That's why some people don't like to borrow money from bank. Even if they take a loan, they try to settle it fully as soon as possible.

Even though I'm not too happy with this particular property loan, I will not regret it.

Frankly speaking, I would be happier to pay less monthly instalment initially to keep more cash.

For investment property meant to be rented out, I'll take maximum loan tenure to pay lesser monthly instalment.

If I were to take 35 years loan tenure at interest rate of 4.5%, the total amount of instalment paid to the bank will be almost 2x the loan amount, as a rule of thumb.

That means that as my loan amount is RM317,100, the interest I need to pay is RM317,100.

Compare it to my actual interest paid of RM116,574, it seems not too bad.

Have I gained on my first property "investment"?

Purchase price: RM348,000

Total Expenses: RM647,912

• Down payment: RM34,800
• Stamp duty & legal fees: RM9,438
• Loan repayment: RM433,674
• Renovation & furnishing: RM170,000 (including renovation later)

The market value of this property today is estimated to be RM700,000. If I sell in now, I will only make about RM50,000 of profit.

It doesn't look like a good investment, mainly because of the renovation & furnishing expenses, and of course, no tenant was helping me to pay the instalments.

If I didn't buy this house and opted to rent a similar fully furnished property, let's say with average monthly rental of RM2,000, I would have paid RM360,000 in rental in 15 years.

This RM360,000 figure has exceeded my house purchase price of RM348,000 but is still much lower than RM650,000 I have spent on the house.

If I were to sell the house now at RM700,000, my net cash flow will be +RM50,000. Compared to if I rent a house for 15 years, my net cash flow will be -RM360,000.

Stock market investors might argue that it is better to invest the RM650,000 cash in the stock market. Probably yes, I agree, but it might be no, as you all know.

If I were to be given a chance to go back to year 2009, would I be doing things differently?

The extra RM200,000 cash I spent on down payment and renovation/furnishing in the first 3 years should enable me to settle the first 10% down payment of 3 investment properties.

However, the feeling of owning a home of ourselves is priceless especially to my wife.

This house, with more space and comfort, has improved the quality of life of my family for sure.

I'll never know whether I have done right or wrong but I won't regret the decision to buy my first property for own stay.

There are people who are against buying a property for own stay and prefer to rent and move around to locations that are convenient to them.

I think it just depends on personal preference.

Nevertheless, if you have a family for example spouse and parent who stay together, then it should not be based solely on personal preference anymore.