Explore the 5% rule for Malaysia's property market to decide between renting and buying. Get insights on costs, benefits, and make an informed choice.
Renting vs Buying in Malaysia: Making the Right Choice with the 5% Rule
Have you ever found yourself pondering whether to buy or rent a home in Malaysia? While many view buying as a superior choice, is it truly the best option for everyone?
The 5% rule, introduced by Ben Felix, a portfolio manager at PWL Capital in Canada, offers a simple framework to help Malaysians make this crucial decision. Before diving into the intricacies of this rule, let's first understand the fundamental differences between renting and buying in Malaysia.
The Myth of Renting
Renting has become more popular in Malaysia, especially in urban areas. Renting, often misconstrued as a money-wasting choice, is far from the truth. Yes, rent doesn't build equity, but not all homeownership costs do either. Renting in Malaysia provides flexibility, allowing you to relocate upon contract expiry. However, a landlord might unexpectedly hike the rent or sell the property, leading to unforeseen shifts in living arrangements and you miss out on equity growth in property.
Homeownership in Malaysia
While owning a home in Malaysia brings a sense of stability and community pride, it's not for everyone. The property market can be unpredictable. Homeownership in Malaysia also entails expenses like quit rent, assessment tax, maintenance, homeowner's insurance, and potentially service charges for condo dwellers. Such costs emphasize the gravity of the home-buying decision.
Unveiling the 5% Rule
To decide between renting and buying, the 5% rule can be instrumental. This rule accounts for three core expenses borne by homeowners but not renters:
- Property Tax: In Malaysia, homeowners need to consider quit rent and assessment tax, which can vary based on the property's location and type. This can be taken as the first part of the 5% rule, though it might be less than 1% depending on your property and location.
- Maintenance Costs: Maintenance, crucial for property upkeep, is approximately 1% of the home's value.
- Cost of Capital: In Malaysia, home buyers usually make a 10% down payment, with the remaining 90% financed through a mortgage. The interest on this mortgage represents the cost of capital, which might be around 3%, though it can vary based on bank rates.
By summing up these percentages, homeowners can expect around 5% of their property's value to go towards non-recoverable costs.
Read about Real Property Gain Tax (RPGT)
Crunching the Numbers
For practical application in Malaysia, take the potential home's value, multiply by 5%, and then divide by 12. If you find a rental below this monthly figure, it might be financially prudent to rent. For instance, for a MYR 500,000 property, anticipate MYR 25,000 in yearly non-recoverable costs, or MYR 2,083 monthly.
Considerations and Limitations
While useful, the 5% rule is a simplification. Factors like varying tax rates and different financing options in Malaysia can affect the exact percentage. For instance, real property gains tax (RPGT) and different bank loan interest rates can influence the total unrecoverable costs.
Whether you're looking to rent or buy in Malaysia, understanding the nuances of the property market is crucial. And as your trusted property advisor, we're here to guide you every step of the way, ensuring your dream home becomes a reality.