Just the other day over lunch, a colleague was discussing with me about renting strategies. He asked if we should still buy a property to rent out, even if the rental could barely cover the mortgage and the maintenance charges. From an investment point of view, my answer is yes. Of course, if we have to keep taking a loss every month, it is not recommended. But first, let me share the âwhyâ and âhowâ.
Why? Letâs look at the bigger picture. The Klang Valley property market continues to be vibrant because urbanization in Malaysia continues to happen. According to the Economic Transformation Plan (ETP), Kuala Lumpur is envisioned to have a total population of 10 million by 2020. Today, there is an estimated total population of about 7 million. Based on a ratio of 4 person to one home, this means that just from the new population of another 3 million, another 750,000 homes are needed. Bear in mind that we have yet to calculate the demand from the existing population, many of whom have yet to own a place of their own.
How? Understand how much you can afford as monthly mortgage payment IF you are unable to get a tenant almost immediately. Budget wisely because this is a long term investment plan, and most of the time, the income is not likely to be a positive return within the first 12 months. Check property portals likewww.propertyguru.com.my to know the typical rent at a certain area. Once you have identified a few areas of interest, then search under properties for sale to find a bargain. A slow market is better than a hot one for price negotiations. Good news: today, the market is slow.
It would be good to have a Microsoft Excel file to help guide you objectively. Once you have viewed and listed down a few, you would be able to make a logical decision. Hereâs a simple example to start with: Once you have found a unit within your budget and expectations, determine your type of tenant.
Would you like to rent out an empty unit or a fully-furnished one? My personal advice would be to rent out a fully-furnished unit. Simply because, there are less fully-furnished units in the market. It carries a premium over the empty units. Furnishing a unit will only cost you about RM 5,000 or lower. Look for discounts especially during warehouse clearance sales etc. Just search online and you can find many opportunities! If you have more time, classifieds sites for second-hand furniture are possible too. A few years ago, I managed to buy a second-hand two-door fridge for RM 550. This fridge is still working well today. The extra premium from the rental would easily cover your cost of furnishing the unit within 18 months. Think big, think long-term.
Another option is to rent your properties to students. To entice them, include a washing machine and a broadband subscription (free internet always works very well!). Bear in mind that this market is more price-sensitive. You would also need more time to manage it but because you can maximize your earnings by renting out room by room, it might be worth it. Looking for a tenant is much easier these days. Going online is the key. If you are confident, you can definitely do it all by yourself too. It is good to engage an agent if you have more than 2 units to rent out. So far, I have always been engaging agents to help me because Iâm constantly running low on time. I may not be free to always bring potential tenants to view the units. When you engage good agents, they will be your eyes and ears. You may even get to know of some good deals from them too.
Coming back to my initial question: why should I proceed even if the rental return is negligible, or even slightly negative? Property prices at certain areas have been increasing at a substantial rate. Many property buyers are speculators: they love to buy where everyone else is buying. Letâs assume that your rental barely covers your rental and your property is worth RM 450,000. If the property price increases by just 2 percent per year, what would the potential capital gain be at the end of 5 years? Well, RM 450,000 x 2% = RM9,000 per year. This means RM750 per month and 5 years later, youâve potentially earned RM 45,000 in capital gain. The average property price increase has always been above 2 percent.
There are definitely loads of horror stories about tenants who donât pay on time and refuse to leave. My aim is to always look for hassle-free tenants, instead of those who bargain hard for a reduction of RM 50.
A few words of wisdom: Build your rental portfolio slowly, and you will soon notice that your rental returns will turn positive.
This story was written by Charles Tan, who writes at www.kopiandproperty.com/