Use EPF Money To Buy Property - Is It A Wise Decision?

I was asked this question by my blog readers, clients and friends:

“Can they invest all or half of their EPF cash (at age 55) into buying a single property for rental income purposes?”

My recommendation is NO.

Taking more than 50% of your EPF cash will reduce your financial capacity and cash flow for future daily expenses and emergency.

Buying a property is a long term commitment. You need to keep the property for at least 5 years if you don’t want to pay the expensive RPGT (Real Property Gains Tax).

Do the MATH, Should you maintain your money in EPF or invest in a single property?

Let’s take RM 300k as an example;

·EPF:

If you maintain the money in EPF, you will get a dividend of 5-6% annually. Ie you will get an average income of RM 1,250 to RM 1,500 monthly.

This income is net, fluid, with no tax or expenses involved, and peace of mind.

Property:

If you buy an apartment at RM 300k, what’s the possible rental that you could get?

Should rental at RM 3,000/month, then you are making a healthy investment decision. After expenses, the property may bring nett revenue of 6% – 8% of the purchase price.

Should rental at RM 2,000/month, it’s about the same income you get from EPF. Why? After deducting the initial and maintenance expenses, your nett rental income could be around RM 1200 – RM 1500.

Should rental lower than RM 2,000/month, then the investment is not worth it. Considering the expenses you have to pay, impact of mistakes, possibilities of the property being vacant for a few months, and stress in maintaining the property.

How much can you withdraw EPF money for property investment?

I am a believer in diversification. After age 55 or during retirement, cash needs to be plan properly. You need cash for monthly expenses, sudden emergencies such as major car breakdown, kid’s wedding, house renovation, or major repairs.

Diversify your retirement fund into a few places. My recommendation is:

8-10%: for usage in a year (daily commitment)

20% : Property or ASB/ ASW

20%: Principal funds or mutual funds (with diversified portfolio equity, balance, sukuk)

50%: remain in EPF account

What are pros and cons investing in property, anyway?

PRO:

1. You own a real asset.

2. Property value is on a long-term rising trend. Hence you benefit from capital growth.

CONS:

1. property is not a liquid asset, you may not be able to sell the property when you want to (with the price that you’re happy),

2. you could end up with negative cash flow asset, costs could be high ie maintenance, repairs, non-paying tenants, bank loan’s payment normally fixed and inflexible,

3. there’s Rpgt tax, legal fees, insurance fees, agents fees when you want to sell the property

There are many auction properties nowadays. Is that a very profitable property investment?

I never have an experience buying a property via auction, as I prefer a house or property which is good and the transaction is easier. An auction might have more complication.

All auction properties are sold on an “as is, where is basis”. So you need to do a lot of homework before investing in it. Below are items to consider;

a. Check whether the property is vacant and nobody is occupying it.

You should go and view the actual property. If it’s occupied, knock on the door and find out who they are. If they are friendly, chances are good that they will be cooperative.

But if they are hostile or unfriendly, it’s best to walk away. You don’t want after you buy the unit and later to be chased by ‘parang’.

b. Hidden cost

Expect the worst-case scenario. As you are not allowed to view the interior of the building, you might have to do major repair damages. Plus, all outstanding utility bills, maintenance and taxes will usually be borne by the new owners.

What are pros and cons of rental property?

Pros – You may get rental income. The surplus can be used to pay other expenses, rental property normally appreciating in value over timed.
Cons – Tenant problems are your responsibility 12/7/365 such as Appliance repairs, flood apartment, noisy neighbour,

You have done your calculation, and 20% of EPF money is good to buy a property. Any good tips?

Based on my experience and guides from my property guru, Milan Doshi, below I share;

8 Tips of buying apartment for rental purposes

Tip #1: Buy at high growth and compact area

Preferably near to MRT, LRT station or close to highways entrance as demands for such properties are higher. Avoid areas that have huge land that potentially has a lot of further development in future. When there are many new apartment projects completed, your apartment unit will be competing with many other landlords.

Tip # 2: Don't buy property that is very far from your home or your workplace

From time to time you need to perform maintenance, viewing of new tenancy’s prospect etc. If you ‘bercita-cita’ to purchase an overseas property, think twice. Should unforeseen things happen in future, it might cost you a lot of flight tickets.

Tip # 3: Avoid buying the biggest unit

especially the penthouses. Recommended are smaller ones such as 2 or 3 bedrooms of the smallest unit as it is much easier and faster to rent out.

Tip # 4: Avoid apartment with only staircase

The reason is that it’s difficult to find tenants who don’t mind walking up and down 3 to 4 times a day.

Tip # 5: Try not to buy on the spot at property fairs

unless the developers are very well established and have a good track record. Some properties that are sold at property fairs are usually unsold units or undesirable locations. Hence don’t blindly book a property based on beautiful brochures.

From my experience, even with their promises of GRR (Guarantee Rental Return), it could be ‘hanya tinggal janji-janji manis mu’.

Tip # 6: Buy Property facing the right direction

It is ideal to purchase a unit that facing east. Besides you get vitamin D in the morning, you could avoid the sunset which heats up the house in the evening. This means it can be very uncomfortable or you have to spend an extra air conditioning bill.

Tip # 7: Avoid the Top or Top 2 Floors

The main reasons are low water pressure. As the water tanks are placed on the rooftop, the water pressure for the top units is very low. Plus, if the roof is not well constructed, the apartment may get very hot in the afternoon. And during the rainy season, there could be seepage problems etc.

Tip # 8: Should you buy brand new or sub sale ?

· Brand new: The advantages are it is cheaper and normally developer will throw a lot of freebies such as free s&p etc. However, you need to assess a lot of risk such as abandoned project, delays in completion, poor workmanship and uncertainty with future residents etc.

Besides that, you need to have a holding capacity to pay a monthly bank loan for up to 1 – 2 years (depending on the density of the apartment or condo) until you get the right tenant. Not forgetting that your borrowing capacity is locked until your unit is tenanted.

· Subsale: It may cost slightly more. However, the risk is very much lower. You can see, feel and touch the property before you agree to buy and you could see who’s living in the neighbourhood. And upon bank approval, the property can be advertised for rental or do the necessary renovation.

Conclusion

Buying a single property using EPF money may seem like the perfect opportunity to generate monthly income, but it can come with a lot of risks if you’re not properly prepared.

Don’t buy the property thinking everything’s going to turn out OK. You need to consider worst-case scenario such as the property is vacant for more than 6 months or the rental rate reduce by half than your original plan.

Photo credit: Image by Gerd Altmann from Pixabay