Ways To Sidestep The Rent Trap

An increasing number of Malaysians are getting caught in the “rent trap”, with accommodation costs taking up so much of their income that they are struggling to save enough to buy a home of their own.

Renting was once a stopgap measure while people saved up for a deposit to get a mortgage for their first home. Unfortunately, booming property prices in recent years have dampened the dream of home ownership for many, especially for those who intend to purchase property nearer to the city centre.

Statistics show that property prices in the Klang Valley have been rising between 15% and 18% annually. The Real Estate and Housing Developers’ Association Malaysia (Rehda) speculates that home prices will go up by about 2.6% margin of increase after the Goods and Services Tax (GST) comes into force in April 2015.

Unfortunately, while home prices continue to soar, income growth has remained tepid. According to the 2012 findings by the Household Income Survey (HIS), the mean monthly household income in Malaysia is currently about RM5,000.

Meanwhile, an apartment in the city centre can cost as much as RM676 per square foot, which means that homebuyers will have to fork out close to RM550,000 (or RM55,000 in cash and RM2,552 every month) to afford a basic 800-square-foot unit – that’s more than half of the mean monthly household income!

Due to this disparity in property prices and income, many are consequently locked out of the prospect of owning a home and are now facing a lifestyle of unstable renting.

The escalating property prices have produced a spill-over effect on the rental market, which sets many tenants up for greater financial challenges as they now have to make do with the diminishing ability to set money aside to save. We examine a few ways you can explore to avoid the property rental trap with the end-goal of purchasing your own home:

1. Live with your parents

One of the biggest advantages of living with your parents is that it allows you to save a lot on expenditure, from rent, utility bills to even grocery bills.

This is especially true for fresh graduates who earn an average starting salary of RM2,500. Rental for a one-bedroom apartment in Kuala Lumpur can easily cost over RM1,500, which will leave the struggling young worker with little to spare throughout the rest of the month.

Of course, living with your parents is hardly a feasible long-term solution. However, instead of spending on rental, which will not produce any financial returns, why not save that money instead to secure enough resources to make the down payment of your first home? The latter will ultimately be more rewarding.

If your ego calls, think of it as an arrangement with your folks until you are able to get up on your own feet. If all fails, you can always offer to do the laundry.

2. Keep a healthy rent-to-income ratio

Typically in the rental market, tenants should not be spending more than 1/3 (33.3%) of their monthly net income in rent. Many landlords keep this ratio in mind when screening through tenants.

Besides providing financial security, it gives the landlord better peace of mind knowing that their tenant is not in a huge money crunch every month. It is also a lot healthier for you mentally and financially.

So in theory, if you are a fresh graduate who earns a net salary of RM2,100 (assuming that your starting gross salary is RM2,500) you should not be spending more than RM700 on rent in a month.

If your rental is edging a little on the high side, you may consider moving to more affordable accommodations, which could be smaller or located further away from the city centre. However, you would need to consider aspects such as fuel prices and the length of your daily commute, as they could rack up significant costs and throw your budget off balance.

3. Factor in all your expenses

It is important to work out your budget and expenses to get an accurate figure of just how much you need to fork out every month. Miscellaneous items such as maintenance cost, internet, insurance and utility bills need to be factored in as they could take up a large portion of your income.

Doing so will give you a clear idea on just how much you need to spend every month. This will allow you to set an appropriate budget to manage your finances effectively, as well as to identify areas in which you can make adjustments to increase your savings.

Besides contributing to your down payment, your savings could serve as an emergency fund to prepare you for life’s unexpected twists and turns. For long-term financial security, financial planners recommend that you save 1/3 of your income for retirement, starting in your 20s.

Whatever your end-goal is, keeping tab of your weekly or monthly expenditures will set you on the right financial track, and inevitably toward the path of escaping the rent trap.

4. Increase your income

There are multiple ways to increase your income without working two jobs. Among them include setting passive income by putting your money in investments such as unit trusts, real estate investment trust (REITs), or bonds.

By investing your hard-earned money instead of stashing it in a fixed deposit account, you stand to gain higher financial returns. Currently, the highest rate offered for fixed deposit is 4.15%. In comparison, some unit trusts funds can potentially rake in up to 8% to 10% returns per annum, while bonds can generate up to 7% returns per annum.

Younger adults can afford to be more aggressive with investing strategies and consider investing in stocks. Though the stock market tends to be volatile and can fluctuate easily, younger adults will have the luxury of time to study their investments and to ride the market’s ups and downs.

It also makes sense to avoid blowing away any financial windfalls that may come your way. Instead, put them into your investments to continue to enjoy the rewards well into your future.

The path towards achieving financial freedom is never easy. Being proactive and financially aware of your spending habits will allow you to navigate the turbulent terrain with greater tact and ease.

With a little discipline and determination, you will be able to overcome the various financial hurdles that life throws at you and over time, escape the vicious grasp of the rent trap.