Another way of looking at it when owning a home is that it is quite difficult, costly and lengthy to extract your money if you were to suddenly need it.
MALAYSIANS love home ownership. Even so, there is a debate raging among investment professionals on whether your house is a liability or an asset.
Nearly everybody has this friend that brags about how he flipped three properties a few years ago and now has a ton of cash.
Of course, the friend that lost money on his property, or is now in court with his tenants, stays silent.
In the strictest sense, liabilities are what you owe and assets are what you own. Hence, when you buy a house (asset) with a mortgage (liability), both increase.
However, a second definition defines assets as anything that makes money, while liabilities end up costing you money.
Rent is neither, as it’s a (monthly) expense. This makes our initial question murky. Your rental income may or may not be sufficient to cover your expenses and interest payments, and your home may appreciate or depreciate in value over time.
One common objection against renting is that after 30 years of renting you will be left with nothing, while if you buy something, you end up with an asset around the time you retire.
This view assumes your rent equates your home loan instalments and conveniently forgets all other costs associated with owning a home, such as fees, maintenance, taxes, utilities, insurance, owner’s association for condos, security, etc.
If you rent, you are able to save this money and invest it in the stock market, which can surely create a nice nest egg for your retirement as well.
When you compare, make sure you include all costs.
There are of course concerns if people retire with a sizeable mortgage, for example, because they moved from a condo to a landed property to a bigger house in a better neighbourhood.
Yes, you could have retired while owning a RM200,000 condo, but not with the RM800,000 terrace house you bought on your 45th birthday.
Another way of looking at it when owning a home is that it is quite difficult, costly and lengthy to extract your money if you were to suddenly need it.
You may not have the flexibility to move as you please and does not help you to diversify your investment as a large chunk of your overall wealth will be tied to one very specific location and asset class.
There are two ways to make money from real estate: either renting it out or waiting for market appreciation.
The net yield on the first is just about worth the risk and effort you put into it and is certainly not a fast and riskless way to riches.
The second route is more of a bet on the future state of the housing market.
Real estate is one of the markets most susceptible for bubbles, which creates big winners and sour losers.
Of course, house prices rise, but so do the prices of everything else, including your income. It’s called inflation and no one is getting rich from it.
The only benefits I see is that if a huge financial crisis hits, you can at least live in a house, as opposed to stocks.
This benefit applies only to your first house and not when you start investing in multiple houses, offices or retail space.
Finally, for people who know they need a big stick in order to force them to save, having a bank on your heels that prompts you to make home loan payments may be the only way to save.
Mark Reijman is co-founder and managing director of https://www.comparehero.my/, dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, personal loans and broadband plans in Malaysia.
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