Friday, August 13, 2010

Property - An Asset or Expense?

In accounting/bookkeeping language, both Asset and Expense are Debit Balance item.

If you owned a property worth RM500,000 - do you really own an asset or an expense?

Actually, both are right since both are Debit Balance. Sound confusing....

Suppose, the ideal ROI for you is 5% (using EPF last 10 years as benchmark), the cost of using the property (as if you are renting it) is RM500,000 x 5% = RM25,000 per year or RM2,083 per month. On top of that, you still need to pay insurance, quit rent and assessment as well as the maintenance.

Can we expect another round of big appreciation like what happened is the past 10-20 years in next 10 to 20 years? Hard to predict.

Malaysia is well known of having slowing population growth especially amongst the Chinese. Can you predict the future supply and demand?

More residential properties will be purchased for investment purposes rather than primary place of shelter. Look at China, supply in certain cities is more than demand for next decade or more.

So, it is not surprising that many old folks with empty nest (no more children staying together with them) will opt to sell the big house and move to lower cost of living places or smaller house. Keep the money for retirement as the "cost of owning an expensive house" is high as per above illustration.

Lastly, property is still an ideal investment but not the perfect and sure-make-money investment. I will still buy another but with careful planning to avoid property-rich-cash-poor trap.