Don’t Invest in Property (Undercon) — It’s Too Late for Millennials & Gen Zs
Is a property a good investment?
What I mean by investing in property is people who buy a property, then rent it out for a couple of years and the end goal is to sell it off after the price appreciates for a handsome profit.
From my observation & experience, undercon property investing is usually not profitable, especially for Millennials (Gen Y) & Gen Zs.
I will be using a Malaysian property that I bought before it was built (undercon is the local slang) as a case study for this article. If you are a reader outside of Malaysia, the principles would be the same.
This article is NOT financial advice. I am sharing my opinions & experience. Please consult a financial planner.
What is an Undercon Property?
The biggest benefit to buying an undercon property is that you’ll get a brand-new home.
Here are the 3 common types of properties bought in Malaysia & their differences:
In the next sections, I’ll dive a little deeper into the pros & cons for an undercon property based on my experience:
Undercon Property Pros:
Let’s begin with the good stuff. The allure of a brand new property:
It’s a Brand New Home
There’s just something about a brand new property. From the smell of fresh paint on the walls to the electrical wires sticking out of the ceiling.
You get to pick out new lightings, furniture & kitchen appliances. It’s exciting to be part of the setup process & a chance to showcase your creativity.
Undercon Property is Cheap to Book
If you’re buying a subsale property, you’ll need to fork out 10% in downpayment + legal fees + stamp duties (let’s say another 3%).
So 13% of an average home price of RM 500,000 = RM65,000. That’s the amount you need in cold hard cash.
However, for most undercon properties, all of the mentioned costs are rolled into the selling price.
You’ll only have to pay the booking fee, which typically ranges from as low as RM 1,000 to RM 15,000.
A low booking fee to own a home is a great benefit for young couples about to start their life together.
: The developer will claim that the legal fees are ‘free’ & ‘no downpayment’ but the reality is, all of these fees ends up in your mortgage, which you’ll be paying over the next 30 to 35 years. Jump to chapter: Marketing Gimmicks.
Undercon Property Cons:
The biggest drawback; you’re buying a property that doesn’t exist. You’re placing 100% trust in the developer that they will complete the project as promised.
The typical Malaysian high-rise build project will take between 3 to 5 years. During this period, here’s what can go wrong (worst case scenarios):
- The developer is dishonest and runs away with everyone’s money
- The developer goes bankrupt
- The completed property looks different than how it’s marketed
Nothing in life is guaranteed, including the developer’s ‘Guarantees.’ But what you can do to minimize risk on your end is to thoroughly research the developer and & their past project history.
Marketing Gimmicks: Cashback Is NOT Free Money
As the property oversupply situation worsens, unsold properties become a real problem for property developers.
Common ways developers put lipstick on a pig is through ‘cashback’ marketing gimmicks.
For example, an undercon property price is marketed at RM 500,000, and all buyers will get an RM50,000 cashback package.
Sounds attractive at first, think about it, how many years will it take you to save up RM50,000?
Think of all the possibilities that you can do with all that money:
- Withdraw as cash & spend as you wish
- Repay your loan (I doubt most people do this)
- Use the money to renovate your new home
The reality is that the developer increased the selling price of the property to include the ‘cashback.’
Cashback Is NOT Free Money
So that RM50,000 ‘cashback’ ends up in your mortgage.
So if you think about it, it’s almost like getting a personal loan for RM50,000 that you have to repay in the next 30 to 35 years!
I’d stay away from any undercon properties marketed with ‘cashback’ gimmicks.
You Have to Pay Progressive Payments Until Construction Completes
When you buy a regular house (subsale) at RM430,000, you’ll start repaying your monthly mortgage (around RM2,000) the moment the bank releases the money to the seller.
For an undercon property, it’s not that straightforward. The banks will release the money to the developer in stages according to the construction progress.
For example, 10% + 15% + 10% and so on until the developer gets 100% of the money from the bank.
Here’s an example of the loan release schedule based on the construction schedule:
You will have to pay interest for the disbursed loan amount that increases at each stage of the construction.
Depending on your bank, my interest payment started at around RM 70 a month.
Every few months, I’ll receive bank letters saying they have disbursed the following % to the developer, and the bank will charge me more interest.
The interest payment will keep increasing until 100% of the loan amount is released to the developer, at which I have to start paying the full monthly mortgage of RM 2,000.
It took 3 years for the developer to complete the construction process. During which I can’t do anything to the property.
Pretty scary stuff.
Dealing with Defects While Still Under Warranty Period
After paying interest for 3 years, you finally got your keys! Hooray! There’s nothing more exciting than going to the developer’s office to collect your keys and entering your new property for the first time.
Even though most new homes have quality checks, many minor things will slip through, and you have to inspect and report any faults to the developer within your 1 or 2 year warranty period.
Some defects are easy to spot. Like shoddy paint jobs:
Even if this is an investment home, it’s a good idea to spend a couple of nights living in your new home to get a feel of the place.
For example, I had no idea that my walls were so uneven until I installed curtains and downlight from the ceiling:
Depending on the severity of your defects, it will take several back and forths with the building management to sort everything out.
Paying Electricity Bill (TNB) Deposit as a New Owner
The new property owner will have to place an electricity deposit to TNB (the local power company).
Head on down to the nearest TNB office near your property to make the deposit payment. Mine was RM910 (USD 219), which caught me off guard a little at that time.
The deposit is shown on your TNB bills each month:
Furnishing the Apartment Costs Money & Time
After everything is fixed and cleaned up, it’s time to install lights, ceiling fans, curtains & some furniture so it’s attractive for tenants to stay in.
It cost me RM 10,193 (USD 2,405) to fully furnish my 1-bedroom apartment.
Here are some photos I took during the setup process:
Expect several trips to the lamp store, IKEA, and furniture stores. Do not underestimate the amount of time and energy needed to furnish your new property. It can take up another 1 to 2 months to complete.
Some furniture stores will also have backorders and delivery schedules, which will delay your home’s furnishings even more.
You also have to take measurements to custom order curtains using a measuring tape. My living area window is two stories tall. I had to get the curtain guy to come in and measure the height using a laser tool:
From my observation, most landlords put minimal effort and money into furnishing their properties. So it doesn’t take much effort for you to one-up your competition.
Put yourself in the shoes of a tenant. What would make your apartment unique compared to the rest?
If you’re targeting a family, furnish your property to appeal to the wife during viewings. My secret sauce that usually works is:
- Buy an oven
- Get a 2 door fridge
- Washing machine + dryer
- Paint a featured wall
- Include some carpets & floor mats
- Place some robust house plants
With a few interior decor ideas from Pinterest & Instagram, you can easily distinguish yourself from the pack while keeping a low budget.
Featured Wall: I picked a color & painted a featured wall to bring some life to a bland white living room. The total cost to buy paint & brushes was only RM 60 (USD 14). The time it took me to paint by myself: 2 hours.
Total Setup Cost: MYR 10,193 (USD 2405)
Massive Competition to Find Tenant Upon Handover
Great, the place is all set up, it’s time to find a tenant to help you pay your mortgage. Unfortunately, that’s exactly what the owners are doing too. They all want to rent it out as soon as possible, for as much as possible, just like you.
Can you rent your place out at the same price or more than your mortgage (RM 2,000)? The only way to figure that out is to check the market price online. Some popular websites you can check are:
Putting yourself in the shoes of the tenant, they are shopping around for the best deal. They know that all of the owners just got their keys and are all competing for a tenant. The ball is in the tenants’ court.
The longer the apartment is left unrented, more and more owners start to lower their prices, bringing the average market rental down. After a few months, the average rental is now RM 1,700.
After a few price readjustments, viewings, and negotiations through your agent, you secured yourself a tenant! Yay! Final rental price: RM 1,600.
Alright, not ideal, you’re at a deficit each month of RM RM 1,600–2,000 = -RM 400.
But it gets worst. Let’s not forget all the other bills that the owner (that’s you cutie pie) has to pay:
- The property agent’s one-month fee.
- The management maintenance fees (usually free for a year or two).
- Quit Rent (cukai pintu).
Phew, that’s a lot of stuff, no one will ever tell you about all of these before you sign that Purchase Agreement.
Let’s whip out a calculator and table spreadsheet to calculate our monthly loss:
Calculating Negative Cashflow
Property Agent: Their fee is usually 1 month of rental + any taxes + stamp duties.
Management Maintenance Fees: These are the fees that the building management collects from all owners to pay for their salaries, maintenance of elevators, general upkeep, and security personnel.
Typically (but not always), developers pay the maintenance fees for owners for the first one or two years.
Cashflow bleed:
According to this table, you’re at a RM 763 deficit each month. In a year, that adds up to RM 9,156!
You need to rent out your property at RM 2,763 to break even.
It’s going to be tough because RM 2,000 is already at the edge of what most Malaysians can afford to rent.
Let’s recap your loses: 2 months of full mortgage payments during the setup process; RM 4,000 + RM 10,000 (setup cost) = You’re currently down RM 14,000.
Undercon property doesn’t seem to be like such a good investment now is it?
Light at the End of the Tunnel
So what now? How can you recoup your money back? I am no expert, but I can only see 2 ways:
- Hope that the area and property become more populated (demand > supply) so you can raise the rental price.
- Hope that after many years, the market value of the property increases, and you’re able to sell it more than your accumulated deficit.
- If all fails, you can stay in your under property while you wait for the above to happen.
Below is the timeline:
Undercon Property Investing Summary:
The property prices have inflated far more rapidly than the increase in the Malaysian average salary. In short, there are too many expensive properties, but not enough Malaysians who can afford to buy them.
Investing in property is old advice that used to work for Baby Boomers & Gen X during their time. Unfortunately, advice that works in the 1980s & 1990s doesn’t work anymore in 2021.
Only buy a normal home (3 bedroom at least) for your own stay.
In hindsight, here’s what I would do instead of buying this undercon property:
- Buy an auctioned property. It might be a good idea to network with people who’ve already done it.
- Buy property during a recession (like during a global pandemic).
- Invest in REIT’s instead, which is like stocks, but for properties. You can check out Marcus’s guide on REITs.
Do share with me in the comments if you have any interesting stories of your property investment journey!
Originally published at https://balkonihijau.com on May 17, 2020.
