Is Property Investment The Only Way To Grow Your Wealth?

Recently there was a news report by Bloomberg stating that Malaysian properties is now priced 4.4 times the median annual household income. The standard optimal price for affordable housing is stated to be only 3 times the median annual household income.
In the past, property has always been used as an investment vehicle to achieve wealth status. Because of this known trend, there are more mid to high priced property projects meant to target these investors.
Meanwhile, youths and millennials are at a dilemma. They knew property ownership and property investment has long been encouraged by their parents but they could not afford it.

Curiously, I did a technical cost comparison if properties in Malaysia (at the current prices and current loan package), are worth investing at all.

Property Investment Scenario 1

So I use a sample property of value RM500,000 for this case study for a comparison if they investor would flip and sell the property after the third year or the fifth year. I am using a conservative increase of value of 3% and also a higher expectation of 5% valuation increase per year. I am using an optimistic monthly rental of RM2500; higher than the loan installment.
With just a simple calculation, the gross profit of property sale within 3 years should yield more than RM100,000. However if we take into consideration all the costs incurred over 3 years, it paints a different picture.

 The net profit is shown here by Gross Profit - Total Expenses + Rental paid over the duration. Because the property is sold after the third year, you will be charged RPGT (which is already incurred into the expenses).

What if the property is sold on the fifth year instead?

So this shows a clearly net profit after we factored in all the relevant costs and expenses. This is a very optimistic scenario with the property having positive net cashflow higher than your loan installment.
But, what if you are unable to match your rental to your loan installment?

Property Investment Scenario 2

For this second scenario, the only change we made is adjusting the monthly rental to match its loan installment. 

Well, it shows that there is a possibility that you can run into a loss if you sold the property at Year 3. 

The property will only earn you less than RM200,000 by the end of 5 years.

Note: This technical comparison does not use the typical ROI or Rental Yield formula, but uses the realistic final net profit to determine ROI.

Assessment Tax : Amount may vary, in these scenarios it uses the standard 4% of annual rental yield.

Maintenance Fees may vary depending on property location and type of property.

Now that we calculated the expected range of ROI from property investment, is there any other opportunities out there?

Any Other Investment Opportunities?

I was mainly a mortgage advisor a few years back when I start to realise that property investment is not the ONLY type of investment I can introduce to my clients. An investor needs to diversify into a few asset class so that we would not suffer when (if) another property bubble hits Malaysia.

So I use the same budget an investor would spend on the above scenario for property investment and invest into Unit Trust instead to compare the potential return.

There are different type of risk level of unit trust investments. This is a projection on a low risk investment which is only targeting 6-8% of return annually. I am using 6% compounding return in this projection to show the lowest return possible from this investment.

As you can see, property investment is NOT the only investment you can do with your money. There are equally and more potential opportunity by diversifying your risks. There is also no risk of missing rental opportunities or handling with house maintenance. 

For more financial wisdom & tips, please proceed to follow or like FinSonia Facebook Page. 
At FinSonia, we believe in educating the public on the right wealth management philosophies.