5 things to consider when saving to buy your first property

Saving up the initial capital outlay for your dream home takes time and commitment but is well worth the effort. (Rawpixel pic)

Question: Rachel is 25 years old and earns RM5,000 a month. She wants to buy her first property before she turns 30.

She has RM30,000 in savings and would like to know how long it will take for her to buy a property, assuming that it would cost about RM400,000. She is also looking to raise funds more quickly in order to buy a property sooner.

Answer: It is important to acknowledge that it takes time to build up savings to buy property. It is better not to rush into a decision if one cannot afford it.

In a recent podcast on Syok, Ikhram Merican discussed “7 steps to raise your deposit for a property”.

This article uses the same insights to help Rachel find out if she can afford to buy a RM400,000 property in her time frame. Here are five things Rachel needs to know to raise funds for her first property.

1. The 25% rule

The 25% rule is a ballpark calculation of the amount needed for the initial capital outlay for a residential property. This is assuming that the buyer is below 35 years old and a first-time Malaysian property buyer in Malaysia.

The amount includes the 10% down payment, 3%-5% in transaction costs, including the sale and purchase agreement, loan agreement, stamp duties and a valuation report on the property.

The remaining 10% is reserved for renovation costs and a buffer of six to 12 months’ worth of property-related expenses.

In order to buy a RM400,000 property, Rachel should have RM100,000 in cash. If this figure seems overwhelming, note that it is perfectly normal.

2. Save monthly property expenses from today

According to the calculator.com.my site, Rachel will pay nearly RM1,600 a month towards her mortgage for her RM400,000 property.

Reducing daily expenses by just RM10 a day and putting it away can speed up savings. (Rawpixel pic)

Other property expenses will include quit rent and assessment, fire insurance, and maintenance fee and sinking fund if it is an apartment – say, about RM400 a month. Rachel should expect to incur RM2,000 in total property-related expenses per month.

Here’s a tip from Ikhram’s podcast – can Rachel set aside RM2,000 a month to buy her property?

Why? Rachel will continue to incur RM2,000 a month in property expenses after the initial capital outlay. If she is not mentally prepared to do so today, she is unlikely to be able to afford the property in the future.

Saving RM2,000 a month is more than just raising funds. It will help prepare her mentally to afford her property.

3. Fill the gap

Rachel has RM30,000 in cash, a shortfall of RM70,000 from the targeted RM100,000 to buy her property. She has to spend RM2,000 per month in property expenses and is committed to setting that amount aside.

Therefore, it would take 35 months to boost her savings to RM100,000 (RM70,000 / RM2,000 = 35 months).

If she sets aside RM2,000 a month from today, she will be able to afford a property in three years’ time, realising her dream.

4. Harness the power of RM10 a day

What if Rachel cannot save RM2,000 a month for her property, or what if she wants to speed up the purchase? Harness the power of RM10 a day.

Rachel can find ways to raise RM10 per day by lowering her expenses by that amount or by earning an additional RM10 per day, or by combining the two — lowering her expenses by RM5 a day and boosting her income by RM5 a day.

There are many ways to do both, but the main thing is to be committed to setting aside RM10 on a daily basis.

This will raise RM300 a month for her property. If she is already saving RM2,000 a month, that extra RM300 will shorten the time needed to raise her savings from RM30,000 to RM100,000 from 35 months to 30 months.

5. Have the faith of a tortoise

Be it 30 months or 35 months, it is still a long time and many would give up buying a property.

Just like the story of the hare and the tortoise, many choose to be the hare in the property game via creative financing schemes, which include mark-up loans and multiple loan submissions. But, do hares win races?

Saving RM2,000 a month seems like a tortoise plan if properties can be bought with little or no-money down payment deals, creative financing or parental support.

But in the end, the process is worth it because it will teach proper financial planning and prepare one both financially and mentally to buy a property.

And the lessons learnt along the way will speed up the process of buying the second property.

This article first appeared in kclau.com.

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.