There are different factors you need to consider when purchasing a home to rent out versus buying a property to house yourself and your loved ones. In this article, we outline the differences between the two to help both aspiring home buyers and novice property investors.
1. Main Transaction Purpose
When it comes to purchasing a property for your own stay, the most important consideration is having a safe and secure home that meets the needs of your family.
Profits and your home’s price appreciation won’t be your biggest concern. This is because your property won’t be generating rental income, and its capital growth is merely paper profit. For instance, your home’s value increased by 50% from RM400,000 to RM600,000. However, you cannot benefit from the capital growth unless you divest your house. Another thing to remember is that property is sometimes an illiquid asset, meaning it’s not always easy to sell and convert into cold hard cash.
In contrast, when buying a rental property, your foremost objective is to go after profits. Generating rental income is your top concern. Therefore, you need to factor in all of your operating costs and keep them as low as possible to get a high return on investment (ROI).
2. Property Size
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When choosing a home for own occupation, most buyers will consider their family’s future size. For example, if a couple intends to have children as well as let their parents live with them at some point in time, they will likely opt for a larger home with more than two rooms. Having more space and rooms for such families is crucial so that you don’t have to look for a bigger and more spacious home over the next decade or so.
In contrast, those seeking a rental property, will most likely choose smaller homes because these are not only cheaper to lease out, but also easier to find a buyer due to their more affordable price tags.
3. House Location
When purchasing a house for own stay, you are less likely to be concerned with living close to the heart of the city, unless that’s where you work. You are more likely to prefer living in the suburbs as daily necessities like food are cheaper there. Also, residential properties in the outskirts of the capital are more affordable, while those closer to Kuala Lumpur City Centre (KLCC) tend to be more expensive. Moreover, the suburbia’s more tranquil, peaceful, and verdant environment is more conducive to raising a family.
When it comes to buying a home for you and your family, you will most probably select an area near your workplace or a location with lots of good schools. You may also prioritise living closer to your parents so that you can easily visit them, while it’s also easier for them to drop by and assist in taking care of your children.
Meanwhile, those on the lookout for buy-to-let properties will give a higher priority to homes near the city centre or those within close proximity to public transport such as MRT stations. This is because such units are easier to rent out to locals as well as foreigners, who are willing to pay a higher rent just to slash their travel time and live closer to the liveliest part of town.
4. Unit’s Amenities
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When purchasing a condo for own occupation, you will most likely have a checklist of amenities that you and your family will require. You will probably exclude amenities that you can live without such a private pool or rock climbing wall. Properties with fewer amenities are also more likely to have a lower price tag due to the absence of non-essential features.
Comparatively, those on the hunt for homes to rent out will take into account the wants and needs of their target tenants. For example, those eyeing married expatriates with kids will likely buy a home close to international schools, while those aiming for single foreigners will opt for one-roomers in a relatively new development with many sports and entertainment facilities.
5. Private Property or Subsidised Housing
The federal and state governments are both offering low-cost housing to help Malaysians purchase their own homes, such as RUMAWIP and PR1MA. Such properties are selling at below-market-rate as the authorities subsidise their construction, but there are certain eligibility requirements for buyers and there are limitations to the property’s usage.
For those buying for own stay, such properties are a good opportunity as they’re significantly more affordable than new homes sold by property developers. But such houses are unsuitable to be used as investment properties due to restrictions. For instance, they can’t be rented out or sold within a certain period.
6. Renovation Cost
Those purchasing a home for their loved ones are typically more exacting when it comes to interior design as they want their living space to reflect their personalities. As such, homeowners usually spend a considerable amount to spruce up their homes. According to local interior design firm Qanvast, the average renovation cost in Malaysia depends on the property type. For terrace homes, it ranges from RM60,000 to RM250,000. For semi-detached houses, it's between RM100,000 and RM300,000. For bungalows, expect to fork out RM150,000 to RM600,000.
On the other hand, property investors will logically opt for a home that needs minimal renovation to keep their business expenses low.
7. Type of Housing Loan
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Your intention for buying a home impacts the type of housing loan you’ll apply for. For investors, the money they spend on the residential mortgage is part of their investment cost. Therefore, they need to keep the investment cost as low as possible, as high expenses will negatively affect their ROI.
As such, people buying rental properties usually opt for a housing loan with the lowest interest rate, even if the interest will spike after a certain period. They are less concerned over the higher interest rates as investors usually have an exit plan by then (i.e. sell or offload property).
In comparison, those purchasing a home for own stay are more likely to obtain a fixed-rate mortgage, so that their monthly instalments won’t increase during the loan’s tenure.
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(Written by G. Zizan, 12th May 2020)
