Sep 14, 2010
S. K. Brothers Realty Sdn Bhd general manager Chan Ai Cheng explores the upside and downside of both renting and buying.
WHY RENT? • When time is of the essence Rent is the ideal option when you need a place in a hurry or on a speedy basis. This is because the process of renting a property is way faster than the process of buying one. A rental transaction can be done in just a day or two! Besides that, you have the choice of the length of stay that suits your needs. You can opt for a year or two, or on a month-by-month basis.
What’s even more attractive to those who are in a hurry is that you have the option to rent a place that comes fully furnished – just carry your bags in! Of course, there is a slight premium to pay for a fully furnished place.
Having said that, in situations where time is of the essence, you may not have the luxury of time nor the upfront resources or necessary contacts to furnish a place to a move-in condition that quickly.
• Flexibility Renting is also the ideal option for those who are uncertain of their stay. For example, a single graduate from out-of-town who is moving into the city for a job may not be too familiar with the new locality. It is usually more advisable to rent in this case. This gives the renter the flexibility to move. When you rent, you can pick up and move almost whenever you want, with very little penalty (perhaps an early termination fee of some kind, should the landlord specify this in the tenancy agreement).
• Less upfront cost When you rent a place, the landlord will require some upfront monies upon execution of the Tenancy Agreement. It is usually broken down into the following: Security Deposit 2 to 3 months’ rent (which is refundable at the end of the tenancy) Advance Rental 1 month’s rent Utility Deposit ½ – 1 month’s rent For example, should the rent be RM2,000 for the unit, then your total upfront amount payable to the landlord is between RM7,000 – RM10,000. Other expenses that you will need to pay are for your own consumption of water, electricity and other services such as Astro and Internet connection, depending on usage. As the tenant, the rental in most instances includes the maintenance fees of the property. You are also free to negotiate with the landlord on what is included in the rent and what’s not. What we just covered is the standard practice.
• Someone else does the repairs Renting relieves you off the risk and headache of maintaining and repairing the structure. If a pipe bursts, if there is a leakage in the roof or if there is some wiring matters, it’s usually not your responsibility. These repairs can come up to quite a sum of money, not forgetting the hassle of getting contractors to fix them. As the tenant, you just call the landlord and in most instances, the repair works will be done within 14 to 21 days from the time of notice.
• Downside of renting You are open to risk that the landlord might increase the rent upon review. You might be all happy and settled in at the place, or if you choose not to renew your tenancy, then you are left in a hurried state to look for a new place. Renting also means that you will never gain ownership of a property, which means that you will have no prospects of making capital appreciation or covert your property into investment property in the future.
• Hedge against inflation Property is commonly perceived as a good hedge against inflation. You want to at least be in a position where the value of your money is maintained, if not improved. Property offers protection against loss of purchasing power resulting from rising prices of goods and services to the extent that your equity increases in value at a rate at least equal to or greater than inflation. Research has shown that property values have generally increased at a faster rate than the rate of inflation and hence property has provided a hedge against the effects of inflation. This has always been property’s fundamental quality.
• Capital appreciation and conversion into investment property With ownership of property comes the potential upside of capital appreciation. You stand to gain from the upside with ownership, unlike renting where you are on the other end, having to pay increased rents with the rise of property values. Should you in future decide to move to a different home, the existing one can be converted into an investment property, generating cashflow from your tenants.
• Pride of ownership and security When you own the place, it’s yours. You are practically free to do what you want with it. You can hang as many pictures and paintings on the walls, renovate, paint and design the place to suit your taste and not have to worry about reinstating the property to its original state upon expiry of tenancy or seeking any permission in writing for such. Having said that, owning is more of a long stay. You have to like where you live.
• Pay towards owning your own home Either way, if you look at it, payments have to be made to occupy a property. It’s either rental payments or loan repayments. The big difference is loan repayments pays towards owning the place whereas rental payments are only for the use of the place for a period of time. When the figures are just marginally different, you should consider owning instead of renting. You can check with banks, bank mortgage tables or use the loan calculators that are available at most banks’ website, to work out the repayment amounts.
• Downside of buying The upfront cost can be heavy. Should you purchase a home in the secondary market, you will need a minimum of 10% of the cost of the property to execute the Sale and Purchase Agreement (SPA) and settle the balance 90% within 90 days which is usually by way of mortgage. Thereafter, there will be monthly commitments to the banks or financial institution for the repayment of the mortgage. There are legal fees involved for SPA, Loan Agreement, Stamp Duties, Insurance, monthly payments of maintenance fees and sinking funds.
Owning a home is more expensive than it looks. You will also need to factor in the cost of renovation, furnishings or repairs. You should also check on the sales price trends of homes in that neighbourhood. If the homes in the area are declining in value, then avoid committing. Other considerations
• Rent with the option to buy This has been increasingly more popular as it gives a tenant more security in terms of remaining in the rented place. This is usually incorporated into the Tenancy Agreement, whereby the tenant is given the first right of refusal to buy, should the landlord put the property up for sale when the tenancy is still running. In most instances, the new owner will honour the existing tenancy. However as the tenant, you are open to more risk. There have been incidences where the landlord has agreed that portions of the monthly rent can be converted into downpayment toward ownership of the place by the tenant. It all goes back to the negotiation between the landlord and the tenant.