Author Topic: Malaysian Case Study - Buy a house with cash or loan & invest?  (Read 3429 times)

ferox

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Greetings from South East Asia, I'm a noob Mustachian, 32 years old, married without kids in Kuala Lumpur looking for some advice. I just sold a home for $1.4million (money is in MYR, but I'll just use $ for simplicity sake) and am unsure of what to do with the money. I intend to settle down in a smaller town about 45mins away from the city center.

Cash in hand from sale: $1,400,000
New house cost: $1,000,000 (for a 2900 sqft linked home)
Mortgage rates: 4.45%
Max loan amount: $600,000 - repayment $2800/month for 35 years
CD rates: 3.8%
Income: $96000 yearly
Savings: $0
Bad debt: $120,000 @ 18%

First plan of action is to pay down the bad debt. But the next question is should I take out a loan and invest the rest, or just pay for the next house in cash. Initial back of envelope calculations indicates that taking the loan and investing it on say a Vanguard ETF fund with at least a 4% real returns is better. (as a NRA, I do not get tax on capital gains but a 15% witholding tax on dividends)

The other thing I tried to look at is downsizing the house. But the surrounding property prices is crazier:
  • $1,5-1,600,000 for a 3700-3800 sqft house
  • $1,000,000 for the 3 storey, 5 bedroom, 2,900sqft house I want
    note: this is the total build up area on a 22' x 70' house (typical for the country)
  • $850,000 for a 1,500sqft condo
  • $5-600,000 for a 1200-1300sqft apartment
  • $330,000 for 470sqft studio
Yes I realize that 2900sqft is overkill for 2 persons, my reasons for wanting to go with the bigger house:
  • The $ per sqft is the lowest among all, making it a great value buy
  • The house is built almost like a duplex, I can rent out the other 4 bedrooms for at least $2400 and live with the wife on the highest floor
  • Condos/Studios are in oversupply and allocation for houses is much more limited (i.e. no one can build more houses
  • Cultural bias - Houses are seen as more desirable properties around here ensuring high demand for decades to come
  • This is the lowest entry point for a landed house as opposed to a highrise in this town
  • Condos charge high maintenance fees around here, typically $0.33/sqft so about $500 a month for the 1500sqft condo

My concerns with leveraging the loan into an index fund is the high share prices. Sure, we shouldn't time the market and who knows which way that will go but I also want to buy low and sell high - which is why I want to put my money in a home and lock in the interest while it's low (in this part of the world) as part of my asset allocation. I'm not interested in bonds and if I do invest, I will go 100% index funds. The only question is how much allocation? - Well, what do you think?
« Last Edit: April 20, 2015, 07:08:29 PM by ferox »

limeandpepper

  • Magnum Stache
  • ******
  • Posts: 4493
  • Location: Australasia
Re: Malaysian Case Study - What to do with my money?
« Reply #1 on: April 20, 2015, 07:20:20 AM »
Greetings! I was born in Malaysia and grew up there, but spent most of my adult life in Australia. I probably can't help you too much with the finer details especially since I have no experience with this property vs shares situation.

However, I am just wondering about the reasons why you are moving to this other town? I know the property prices have been going up quite quickly in Malaysia over the past several years, but there are still some suburbs/townships where you can get a landed property for much less than a million. I am guessing you are moving to be close to your job? Are there other options which are not too far from your job with not so crazy prices? If you are not planning to have kids ever and you want to stay in this town for many years, I would actually be tempted to go for the studio, or maybe a 2-bedroom apartment if you want some extra space. Or if you're not very certain about your future plans, maybe you can rent for a while and see how things go, before committing to a property.

ferox

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Malaysian Case Study - What to do with my money?
« Reply #2 on: April 20, 2015, 06:19:20 PM »
Hey limeandpepper,

Said town is called Cyberjaya, yes I'm moving closer to work for both me and the wife. Currently commuting cost alone is $1200 a month not including the 30 hours lost sitting in the clown car. I love the town, am planning to stay there many years, retire there and looking to have kids along the way. (Not necessarily in that order)

As for the property situation, we're in a bit of a bubble:
"Notably, house prices climbed 12.3 percent year-on-year during the last five years."

However, that's the same thing everyone has been saying for the last 10 years or so. Prices historically doesn't adjust downwards even through tough financial times (i.e. the last few market crashes) because the holding power for landed (i.e. houses) is and remains very strong - investors just wait it out and refuse to sell at lower prices. Of course there are foreclosures but you can't finance these - 100% cash only. In short, prices has shown to stagnate or bubble upwards. But I guess no one can predict the future.
« Last Edit: April 20, 2015, 06:41:55 PM by ferox »

limeandpepper

  • Magnum Stache
  • ******
  • Posts: 4493
  • Location: Australasia
Re: Malaysian Case Study - Buy a house with cash or loan & invest?
« Reply #3 on: April 21, 2015, 10:21:36 AM »
Wow, the reduction in your commute will certainly be a positive change. And if you love the town and you are planning to settle down there with kids, I can see the reason in getting a place you really love and are happy to stay in for many years.

If you are set in buying a place, I'd probably be more inclined to get it in cash, because I'm a bit conservative in that way, and the guaranteed savings in mortgage interest is an attractive aspect to me. But I'd be keen to see what other people think as well.

Lodd

  • 5 O'Clock Shadow
  • *
  • Posts: 1
Re: Malaysian Case Study - Buy a house with cash or loan & invest?
« Reply #4 on: May 28, 2015, 03:40:42 AM »
Hi! I'm a Malaysian as well.
Glad to see some fellow malaysians on this forum. And congrats on getting your hands on 1.4 mill by 32!
I'm 29 myself and still have less than 50k. Just started on my mustachian journey early this year.

Here's what I would do in your place:
  • (400k) + 600k Take a loan for the house. The malaysian property sector isn't as volatile as the US. Like you said, there's a very low chance of landed property going down in prices. In the worst case, it'll probably just plateau for a while.
  • (120k) Pay off your bad debt completely
  • (500k) Vanguard ETF US
  • (300k) Vanguard ETF Global
  • (80k) Emergency Fund
Total spent ($1.4mil)

Just in case you haven't factored in RPGT (Real Property Gains Tax), take that out of the index fund buys.
Renting the bedrooms out for $2400 would be great. It would be even better if you can hike that up to $2800 to cover your mortgage. I agree on the exorbitant costs of condo/studio maintenance fees. You're better going off with a landed property.
Cutting the commuting costs is brilliant. Any idea how much you can reduce it to?

Just out of curiosity, are you a Malaysian citizen or expat living in the country?
And please do share your story of how you got your hands on that $1.4mil house at such a young age. I would love to learn from a fellow Malaysian.
Hope my opinion helps!

HattyT

  • 5 O'Clock Shadow
  • *
  • Posts: 49
Re: Malaysian Case Study - Buy a house with cash or loan & invest?
« Reply #5 on: May 28, 2015, 01:02:47 PM »
Playing the devilís advocate here.
One of the theoretical downsides of buying a house/property in cash is the risk that you wonít like living there and want to move/leave.   What if the home were made uninhabitable by Ö say a sink hole or faulty construction or some natural disaster?  What if you discover your new neighbors were unneighborly enough that you didnít want to live there.  Or on the positive side, what if the king of your world, letís say,  Bill Gates, or Oprah or the queen of England or MMM calls you to propose a unbelievable awesome project/ opportunity that means not living in that home.  Would you have more flexibility if all your money werenít tied up in that one property?  Even though you could buy a property in all cash, you may want to live there 6-9 months at least to be sure that you are sure that the property is working for your family before tying up such a substantial portion of your portfolio in such an un-liquid investment.  You can always pay the loan down/off later.

skunkfunk

  • Handlebar Stache
  • *****
  • Posts: 1057
  • Age: 33
  • Location: Oklahoma City
Re: Malaysian Case Study - Buy a house with cash or loan & invest?
« Reply #6 on: May 28, 2015, 01:17:12 PM »
Not at all familiar with Malaysian real estate, but here goes.

I'm usually a big proponent of owning a home. The risk/reward, inflation hedging, all that stuff, whatever, I just don't want to have a mortgage forever. Shouldn't matter, doesn't change my retirement date much either way.

However, you indicate no savings. If you have no other investments, I'd argue that you are insufficiently diversified to buy this house outright. Given that you plan to rent out the rooms and have no other investments, take the loan and rent it out. You'll still have 40% equity and your payment won't be much after renting out those rooms.

My 2 cents. I know very little about all of this aside from what is written in MMM blog posts, so take that for it is worth.