Updated: Jan 15, 2020
When I had graduated, property investment was the last thing on my mind. I had a privileged upbringing which was nice but it came with a drawback. I did not value saving and investment.
I took it for granted that my parents would always fund me. Believe it or not, some people (like me) actually harbour such delusions!
Needless to say, the reality of life descended on me like a grand piano falling from the 5th floor of a building. I sometimes wonder what could be, had I been more financially prudent and savvy from an early age.
You cannot change the past, but as a human being with the gift of imagination, you can reflect. And so this post is a reflection of how I would have invested had I known then, what I know now.
Spend Less, Save More
Starbucks, bubble tea, and fancy restaurants are a luxury I would drastically cut down on. I would have a monthly budget prepared that includes saving at least 10% of my income.
Prudent financial management is a skill that must be developed as early as possible. This is the biggest stumbling block for most graduates who want to invest in property.
All the most successful property investors I know, without exception, are great at managing their money. They spend within a budget, they save, and they also put aside some money for investment.
PTPTN loan for example MUST be paid promptly and diligently. Credit cards should be used with extreme caution.
Fresh graduates are a boon to the credit card industry. It's the fastest way to get into unmanageable debt and pay an exorbitant amount of interest in minimum payments for the rest of their lives.
If I were a fresh graduate again, I would treat my credit card exactly like a debit card. In fact, I'd keep it at home and only use it for small online purchases like movie tickets or flight tickets just to have some credit history for mortgage applications. I'd pay the full outstanding every month and keep the balance at zero.
Most of the time fresh graduates are unable to get loans from banks to buy properties, it's due to bad money management that results in irregular credit card and hire purchase repayments or delinquency on PTPTN loans.
Fresh graduates should focus on building good credit worthiness so that they're primed for getting a mortgage. This leads me to one of the biggest household expenses...
To Hell With the Car
A car is a liability. Especially if you have access to public transportation. If I take a 9-year hire purchase loan on a Perodua Axia which costs about RM23,000, I would pay RM26,000 for the car at the end of the loan period.
The residual value of the car at the end of 9 years may be RM6,000. During the 9 years, I could pay as much as RM40,000 on insurance, fuel, and maintenance.
Therefore, I would be committing to spending about RM60,000 for this car over a period of 9 years.
Now, assuming I worked in KL and used the RM100 unlimited monthly travel pass for public transportation and Grab car occasionally, my spend over 9 years could be halved to RM30,000.
This effectively gives me additional cash every month to save for a property or to service the loan on a property. Now, that I have the cash, what should I buy?
Start Low, Start Small
I lived with my parents for the first 5 years of my working life. Most of my cousins lived with their parents as fresh graduates as I suspect many other people in Malaysia. During this period, one can already buy an investment property.
But instead of looking at "sexy" properties in trendy developments, I would look at low or medium-cost properties. Some of my friends who are good property investors with big portfolios today, started with properties below RM100,000.
5 years ago, someone I know well bought a flat in Taman Fadason, Kepong for RM60,000. He spent about RM15,000 on renovations to make it look really nice. It has always been tenanted, with positive cash flow and has appreciated to RM130,000 in 2019. That's over a 100% appreciation in 5 years.
Another friend of mine bought an apartment in Puchong for RM150,000 in 2008. It is worth roughly RM400,000 in 2019. A 167% increase in 11 years. Not bad at all.
I would start with properties like this - low or medium cost in good locations. The additional cash flow from rental, would supplement my earned income and provide me with the basis to get financing for more such properties. Over the long-term build I could build a small portfolio.
A very, very important element of purchasing low-cost property is the possibility of sale restrictions. For example, your income may have to be below a certain threshold which can differ from state to state.
Pick the Right Kind of Low
Not all low or medium-cost houses are good pickings. What is good is a function of simple economics.
The property should have demand.
Therefore, look for demand drivers. In the example of the flat in Taman Fadason, it had the advantage of being close to the city centre and in the vicinity of many surrounding small businesses that employed people.
I would look out for the following:
Proximity to public transportation (bus stop is also public transportation)
Proximity to a successful shopping mall
Proximity to city centre or business centre
Relatively high property values in the surrounding area
An example of a development that meets all this criteria is Desa Mutiara in Mutiara Damansara.
But hold on. Why am I talking about buying investment properties and not a property for me to live in?
Prioritise Buy-to-Rent over Buy-to-Occupy
After crunching numbers on a large amount of property purchases, it is clear to me that buy-to-rent properties have a better return advantage. This is because, you have a tenant to help service the mortgage.
This fact, makes the returns immensely better. It is why I would first buy an investment property if I were a fresh graduate. I would prioritise building a small portfolio which can then by divested in part to fund the purchase of a buy-to-occupy property if I so wish later in the future.
You may be wondering where would you stay if you only bought investment properties? You could rent. Check out my post on buying vs. renting.
This is not a definitive guide and may not be every fresh graduate's cup of tea. It is how I would do it, given what I know now.