You don’t have to be super wealthy to buy more than one home, in fact with strong savings, a steady income, and well-managed finances, almost anyone can be the proud owner of a second home.
This isn’t to say that buying again will be easy; you should expect to work as hard as you did when landing your first home. But is acquiring a second home really worth the effort? Here are some reasons why you might want to consider snapping up your next piece of property soon:
- You can build financial net worth. If you’ve recently come into a good sum of money but are uncertain of the best way to grow it, you will definitely do better with a home purchase rather than upgrading your car (unless a necessity) which almost always has a negative return.
- Get in on a gainful retirement option by buying and holding off on selling for at least five years to cultivate significant long-term equity on your home and further increase profits by avoiding Real Property Gains Tax costs.
- Receive a rental income for your golden years.
Is it a feasible purchase?
No matter your financial circumstances, you will still need to meticulously review your ability to take on a second major money responsibility.
So are you truly ready? Here’s a feasibility test to help you consider if the right time to buy another home is NOW:
Consider making a second home purchase if:
1) You have a stable and adequate income stream. Your earnings should more than sufficiently cover your current mortgage, living expenses, other debt and more importantly, your estimated new loan instalments.
2) You have solid savings. How solid is solid? Well, it’s best to have enough to pay for deposits and other entry costs. Otherwise, be ready to borrow against the assets at your disposal to increase your cash supply (e.g. performing a cash-out refinance or withdrawing savings from a life insurance policy).
3) Market conditions are favourable for a property purchase. Note that even though home prices itself do not go down, it does tend to moderate in certain climates. This is usually the best time to buy new-sale properties as developers make the push to sell and with that come attractive promotional offers. However, the same does not necessarily apply for sub-sale homes unless the owner is in distress and requires an urgent sale.
On the flipside, the timing may not be right for you to buy if:
1) The decision is a hasty one. If you haven’t had enough time to properly research the type of property, location and its potential returns, you may be moving too quickly.
Quick Tip: Explore the right properties by using PropSocial to post your requirements and find exactly what you need.
2) Your level of debt is overwhelming. Even as banks vary on how much they are willing to lend and what they consider to be debt (some do not include credit card balances or unsecured loans), your new home loan may not be approved if the debt-to-income ratio goes beyond 33%.
Furthermore, if you have high levels of debt that banks are not counting on, you may find it difficult to make loan repayments in the future.
Now that you have considered the practicality of buying your next home, try these tips to effectively start the process of home-ownership for the second time:
1) Establish goals
You first have to know why it is you are deciding to buy again as this dictates the type of home you purchase, how much you will spend, the amenities required and its location. Generally, if you do not plan to live in your second property and depending on your budget, you may opt for more basic homes that turn profits faster and offset instalments better.
The reverse is also true; some homeowners prefer to live in more modest homes while renting out the fancier property (e.g. security, nice view, modern design, etc.) to cultivate better rental incomes.
However, do be careful when overestimating these rental incomes, since even though nicer homes fetch higher rentals, they still on average, also cost more. As a rule of thumb, do measure potential rental incomes as not more than 50% of your loan repayments.
2) Find good deals
There are usually, two ways a property purchase can be considered a good deal: (1) the price of the home is undervalued and (2) the interests on financing have been lowered.
To source for cheaper homes, do refer to the Malaysia Department of Insolvency public property auction especially if you have an appetite for risk. But caution is warranted with any type of auction property as it can be an unpredictable and messy process (read more about auction properties and how to avoid its pitfalls).
Bonus tip: Check back often with PropSocial to research prices and compare properties for sale.
Secondly, do look out for changes in interest rates as lower ones will work in your favour to improve affordability. You may be able to negotiate better rates with lending banks or take advantage of their special promo rates and reduce overall borrowing costs.
3) Improve Affordability
- Stay up-to-date on tax reliefs and exemptions – If letting your property, you may need to pay for taxes imposed on your rental income but the good news is that you may be entitled for relief of related expenses. For example, repair and service costs as well as assessment tax and quit rent (for full list, do refer to the Internal Revenue Board of Malaysia’s official website) can be deducted from taxable rental income.
- Buy your property jointly with spouse, siblings or parents – This is a good idea for those who need to share the financial burden in terms of repayment and as well obtain a larger sum of financing. Moreover, if you can jointly place a larger down payment, you would essentially borrow less, make smaller monthly instalments and save on total interest costs.
While you’ll undoubtedly receive conflicting opinions on whether or not you should buy another place, the decision will ultimately boil down to your budget.
Thus, if you have intentions of buying again but lack the short-term cash you need right now, make sure you set up a ‘second home fund’ to help you concentrate your income towards a long-term goal that is rewarding in more ways than one.
(Written by: Desiree Nair, 7th January 2016)