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This ratio is important as mentioned in my previous article about Bank Loan Amount That You Can Borrow. When you have more and more properties/investments leveraging on mortgage, bank views that as your commitments. If we were to convince bank to loan us money to buy more properties, one way is to keep this ratio as low as possible. Again, I do not know the exact DSR of all the banks out there as it varies from bank to bank and maybe from time to time. Based on my experience, 60% is not a bad estimation.
There are 3 components in DSR,
Total commitment (D) – all kind of loans and debts such as mortgage and credit card
New commitment (N) – monthly installment of your new loan application
Net income (I) – net reported income after deducting EPF, SOCSO, KWSP etc
Debt Service Ratio (DSR) = (D+N)/I
Following the guideline set, you can try to keep your DSR not more than 60% to avoid loan rejections.
How to get more or unlimited loans? Referring to DSR, you can reduce your debts through repayment or settlement. Next, the most straightforward way is to increase your net income. Besides career advancement, you can declare your rental income, part time income, freelance income etc.
After understanding about housing loans, should we invest in cash?
Most of us borrow from the bank, using mortgage in order to fund our investment/purchase. I personally do not know the exact formula used by bank to evaluate an individual’s loan limit. However, I would like to share with you a way to gauge your loan ability to answer the main question here: How much I can borrow from the bank to invest in this property?
First thing first, we need to know:
1. CCRIS (Central Credit Reference Information System) – This system is created by Bank Negara Malaysia (BNM) to synthesize credit information about a borrower or potential borrowers into standardized credit reports. This report consists of:
(i) Outstanding loans – Housing loans, hire purchase, credit cards, personal loans, overdraft etc. Pay attention on payment behavior and legal status of any account under your name
(ii) Special Attention Accounts – Usually accounts deemed Non-Performing Loan (NPL), or under special debt management schedules
(iii) Loan or credit facility applications made in the past 1 year – How many were approved / rejected. This is the reason why we should not apply multiple banks at once.
You might have directly or indirectly created a bad impression to the bank if:
● Your account is under legal status or special attention
● Missed/Late repayments, bounced cheque. Submit loan application only after 12 months of your last missed/late repayment.
● High Debt Servicing Ratio (DSR), total outstanding debts over income. Pay/settle some of your loans/credit lines before submitting a loan application
● Multiple active loans/credits application, use home loan comparison tool or approach relevant specialist to apply selectively for the best product.
It’s important to have visible credit history so that it does not hurt your credit score. Make sure that you have at least one active credit facility and pay on time.
2. CTOS (Credit Tip-Off System) – It is an electronic library of historical information captured from publicly available sources and archive as such. Updates are carried out by CTOS whenever it captures case settlements from parties involved namely the plaintiff, defendants, their lawyers or new information from related source documents.
It’s widely used by the majority of the country’s Financial Institutions, Commercial Companies & Businesses, Legal Firms and other institutions. Unlike CCRIS, CTOS is owned and managed by a Malaysian company, collating information on Individuals and Companies from various sources found in the public domain which is then formatted into an electronic database which provides for efficient checking process upon loan application.
Now, assuming that you have fulfilled the two pre-requisitesabove. We can follow a simple rule which I picked up through my preious deal. If you have any forms of debt such as outstanding loans, credit card balance etc, just make sure that it does not exceed 2/3 of your net income/salary. For instance, you have:
Net salary: RM5,000
Monthly credit card: RM1,000
Monthly car loan: RM1,000
Net income after deducting commitment: RM3,000
Loan amount he can commit: RM3,000 x 70% = RM2,100
Basically, this is how I estimate my personal credit limit so that I know the amount of bank loan that I can commit. Let’s look into DSR here in particular to understand how it affects number of loans that we can borrow. This is an important question eapecially for season real estate investors who like to leverage on housing loans.
There are a few costs/fees that we need to take care upon buying a property.
1. How to estimate SPA legal fee (lawyer)?
1st RM150,000 – 1%
Next RM150,000 – 0.70%
Next RM2,000,000 – 0.60%
E.g., purchased price = RM350,000, total SPA legal fee is RM1,500+RM1,400=RM2,900
2. Stamp duty fee (government, Memorandum Of Transfer)
1st RM150,000 – 1%
Next RM400,000 – 2%
E.g., stamp duty for the example above is RM150,000×1% + RM200,000×2% = RM5,500
3. How to calculate loan/mortgage agreement fee?
Similar calculation as SPA legal fee but based on 90% of the approved loan (let’s assume that this is a residential property).
Using the example above, mortgage amount = RM350,000 x 90% = RM315,000
Loan legal = 150k x 1% + 150k x 0.7% + 15k x 0.6% = RM2640
4. Stamp duty fee for the loan agreement
Mortgage amount x 0.5%
Stamp duty = RM315,000 x 0.5% = RM1,575
My example above is based on my previous purchases. For property price more than the given example, you can always check for the latest fee (%) online. However, I would not expect much difference when comes to cost/fee estimation upon purchasing a property.
For 1st time property investor, you might want to set aside some other fees such as agent fee and renovation fee. Check out our formulation to evaluate a property investment here.
Here are some important formulations which I found to be useful in making property investment decisions:
1. Adjusted Rental Yield = (Rental x 11 months)*100% / (Purchased Price)
We can fix the our expected rental yield before searching for the right investment. An example: twice the inflation rate (say 3%), then expected rental yield can be 6%. We can also benchmark this against the bank’s fix deposit (FD) rate instead.
2. Return on Cash = (Net Profit / Initial Cash) x 100%
For example: bought a new studio.
Initial cash: 4,000
Selling price: 300,000
Return on Cash = 5000%
3. Occupancy Rate ~70%, as high as possible especially when you are expecting rental income. Observe and roughly estimate the units with lights on/hanging clothes/renovation over total units in a building/neighborhood/area.
4. Historical growth
Price appreciation/depreciation of a property over the years can now be checked at various websites such as I-property, Propwall, BRICKZ etc. For instance, we can simply benchmark its average/recent growth rate against inflation rate to get an idea of the performance a specific property.
These are the 4 meaningful numbers (not limited to) which I found relevant and practical for property investment. Happy investing! Check out our cost/fee estimation upon purchasing a property here.
I have read a very interesting article from Hong Kong about the types of signals that we can refer to when property bubble is going to burst.
How property bubble is formed in the first place?
Before a bubble bursts, the reaction of the crowds in property investment is indeed important. Generally, their reaction can normally range from pessimistic to optimistic and become over-excited at the end. When the crowds are over-excited, their decisions are not rational most of the time. For instance, they will buy properties regardless of the loan’s interest rate, household saving, property price and risks. When a property bubble bursts, the crowds will resume to pessimistic mode and another repeated cycle will take time to happen again.
There are 3 signals that are worth to take a look when we need to evaluate property market:
1. House price-to-income ratio
For developed countries, typically the ratio will be ranging from 1.8 to 5.5 times. According to the methodology recommended by World Bank to evaluate urban housing, affordable house price-to-income ratio should be 3.0 and below. In another words, we need 3 years to save enough money to purchase a property. For example, Shanghai & Hong Kong (>36.0), Guangzhou (~25.0) and New York (>10.0). However, this index is depending on the location, demography and government’s strategy on that area.
2. Debt-to-income ratio
There is no limit or general definition of how debt-to-income limit should be designed. It’s effect can vary depending on different designs. For example, the limit can be designed to target individual households or the bank’s lending stock. A number of countries have adopted this index by establishing an upper limit to a household’s total loan in relation to its disposable income. This ratio can be compared to worldwide ratio to have an idea about property bubble. Normally, 50-60% is still considered acceptable and note that most of the released data regarding household debt actually includes other debts such as consumer debts and mortgage loans and not only housing loans. Some of the countries/areas which have debt-to-income ratio more than 100% are indeed at higher risk for investment.
3. House price-to-rent ratio
This is referring to home price to annual rental rates. Based on statistics collected during economy crisis in 1997 and 2007, a reference figure can be around 100%. If we observe a figure which is lower (<100%) than the reference, that could be the right period to buy/accumulate properties.
I will discuss in more details in my coming article to relate these 3 signals with Malaysia’s property market. Check out our 2017 outlook for property market. At the same, we should also take into consideration the effect of macro-economy for example interest rate increase by Fed etc. You can also read the recent updates of property related news and like our page here.
The slogan “location, location, location!” is no longer the most important factor for real estate investment, at least not all the time. Many great locations have become hot, too pricey and unworthy for investors to pursue especially when economy is going down, just not wise! Not everyone affords to buy properties at the city centre. For an investor without a super deep-pocket, we should not risk our money and limited loan opportunity for solely location especially a mature location. Yes, you might still make a profit having higher chance to make a mistake at the same time.
During tough period, I prefer property with higher rental return. If I had to take a larger loan for property at a hot location but getting the same/similar rental yield as another property at outskirt with much more smaller loan, I will go for the later for sure even if it is a RM 100,000 property. There are certainly opportunities out there during this challenging time. Just like stock market, there are winners and losers during bull market and bear market. Places in city centre would become saturated and home buyers are now considering places further away from the city. Very simple, tighter bank loan, rocketed property price in the city and better quality of life (with the improving infrastructure) are among the reasonable factors.
Rawang (north), Port Klang (west) and Seremban (south) in Malaysia have tremendous development recently. Good take-up rate has shown in Semenyih and Seremban lately, time has CHANGED! A more suitable mantra now should be “AFFORDABLE, AFFORDABLE and AFFORDABLE!” There are about 100,000 people commuting back and forth between outskirt cities and city centre everyday. They are adapting the travelling distance and this shows a new trend during challenging time. This can become better with more and more train stations being built to connect to areas like Kajang, Cheras, Sg. Buloh and etc. We can sometimes look into some LOW/MEDIUM cost landed properties in mature area at the outskirt especially if the rental yield is more than 5%. For beginner, this costs you lesser down payment, smaller loan and better liquidity when you want to sell it. Here are some factors that you need to consider when buying a property in 2017:
1) Affordable price
3) Good rental yield
5) Lower price (smaller loan)
6) Good liquidity (in demand, easy to dispose especially price is affordable)
7) Foresee better infrastructure in future (optional)
I strongly believe that the trend now is to move outskirt for cheap, affordable and potential properties especially during challenging period. Well, this is solely my personal view and strategy to invest during bad time. We adjust our strategies from time to time. For now, AFFORDABLE and LIQUIDITY will allow you to save and wait for the best deal to come, who knows what will happen tomorrow. If you require an independent party (not representing real estate agency) to search/accompany/advice you in real estate investment, feel free to reach me here. Let’s make little impact today and in future by investing together! Happy hunting and investing!
Everyone is talking about property bubble. When it will come? You can refer to the post here.
What Can We Do To Avoid Bad Tenants?
What if we have bumped into bad tenants? Here is what we can do to tackle them.
It’s a nightmare when bad tenant conquered our property! Installment is awaiting us but we are not collecting positive return as expected. To the best of my knowledge, we should not enforce our right to reclaim our property when our tenants in common have not paid for two to three consecutive months. YES, although tenancy agreement allows us to do so but landlord is prohibited from evicting tenant or recover possession without a court order. Now, what are the landlord rights?