## How Much Should a Property Really Cost You?

There are generally three approaches to calculate the right price for any property; using historical data, using today’s data, and using future data. Most people use the first two approaches as they are more straightforward and easily understood, but in this post, I will focus more on the third approach – using future data.

## Common approach – using historical and today’s data

Using historical transaction data – starting from launch price to the recent transacted prices, one will be able to calculate the average yearly capital appreciation and use that to estimate the reasonable price tag for a particular property at this point in time.

Using today’s data is only possible recently with the help of SRX’s live platform which provides real-time transaction information. However, this real-time information is not available for individual buyers or sellers who are not represented by an agent which put them in a less favourable spot when comes to getting the best deal.

By referencing to historical and present data, the common approach has a goal of validating if the current asking price is the right entry price to buy – entry strategy. In the next section, I will introduce an approach that is closer to an exit strategy.

## Less used but powerful approach – using future data

This approach is not new to the financial world, but very under-utilized in the arena of real estate.

It is the discounted cash flow approach.

It looks at bringing the projected future income into today’s monetary equivalent so as to get a meaningful indication if the cost to purchase is worthy or not.

### Step 1: List down all yearly income and expenses

• Multiply recurring monthly income and expenses by twelve to get the yearly amount
• Include all cost of buying and selling such as legal fee, agent’s fee and etc.
• Set aside some expenses for some minor repair work

### Step 2: Discount net cash flow for each year to present value

• For each year, sum up all the income and minus all expenses to get the net cash flow for the year
• Calculate the present value for each year by using the formula in the diagram below

### Step 3: Sum up all discounted present value

• Add up all discounted present value
• You will get the net present value of this property
• This is how much it should cost you to buy today

## Should cost method is always wrong

Just like any estimate or projection, this should cost method will always be wrong. It can never be entirely correct.

Due to the assumption made on interest rate either constant for the entire time period or varies as per your subjective interpretation of the future and the inflation effects on future income and expenses, these uncertainty makes it only an estimate.

So why use this method?

Because we all have an interpretation of the future whenever we buy any investment product (consciously or subconsciously), and this method will allow you to quantify them into numbers.

Should cost method will allow you to quantify interpretation of the future into numbers.

Hence, by using these numbers will bring objectivity in when you are comparing a few properties based on the same assumptions.

This is how you should shortlist and find the right property to invest.

Are you already using this method?

## 31 thoughts on “How Much Should a Property Really Cost You?”

1. Not sure about property in SG…but owning a property in MY is a pain in the ass even for 30s working adults…

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2. alright, pin your post and I shall refer the tips in future, thanks for sharing yo!

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3. sherrygo says:

property MY here so expensive. SG not sure of it until I read here.

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4. lovely article! I need the information so much as I am planning to buy a property soon

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5. Really Good article! its help! thanks for sharing!

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6. Hui Ying Fong says:

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7. Great insight, the graphs made the info so easy to understand, thanks 🙂

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It is no wonder more people use the historical and today’s data for the ease and convenience but the future data provides more meaningful information for an investor.
Thanks for sharing this and will keep it in mind when I get a property in future.
Cheers,
Everest

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1. Thanks for your kind words Everest ! All the best for your property purchase, feel free to look for me if you need any tips 🙂

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9. Awesome insightful post!
I’m looking to buy a property as investment in KL too, hopefully can afford haha

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1. Thanks Charmaine, start early on the financial planning and get a In-Principle Approval before going to look for potential properties.

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10. Thanks for the tips! Buying a property in Malaysia might different case with Singapore…

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1. You are welcome Shini! yup certainly, there are differences in regulations, loans and formalities. But the concepts in real estate is very fundamental and it can be applied globally 😉 Get the concepts right and you will get yourself good properties any where in the world 😀

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11. Thanks for the tips and step teaching how to count! Really need to learn a lot from you =D

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12. Thanks for the tips and steps on how to count the cost all! Really need to learn alot from you =D

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13. Betty says:

Certain income that we earn can determine whether we afford to owe a property. For mine, I need to pay RM 3k per months include maintenance. I have to plan my budget wisely.

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1. Hi Betty, sounds like you are getting there. Continue to manage your finances and plan for divestment and new investment to grow your assets gradually.
Feel free to drop me an email and we can go in depth on this 🙂

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14. properties in malaysia is getting higher every day. no chance the price is going down even the economy is not doing very good

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1. JB prices are higher than KL due to a simple fact that many buyers from Singapore are pushing up the price. When the high speed rail between SG and KL is ready, imagine how will the property prices in KL reacts?

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15. Property is so expensive and for someone living from hand to mouth on a monthly basis.. it is near impossible for me to own one…

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1. Hi Miera, the day will come. Stay positive and continue to hustle for a better future! Keep going keep grinding! 🙂

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16. Arisa says:

Very useful article for those who are planning to invest on their very first property. Not everyone knows these details.

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