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\u00a0every month, it is not recommended. But first, let me share the \u2018why\u2019 and \u2018how\u2019.<\/p>\n
Why?<\/strong><\/em> Let\u2019s look at the bigger picture. The\u00a0Klang 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\u00a0by 2020. Today, there is\u00a0an estimated total population of about\u00a07 million. Based on a ratio of 4 person to one home, this means\u00a0that 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\u00a0yet to own a place of their own.<\/p>\n How?<\/strong><\/em> 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<\/a> to know the typical rent at\u00a0a certain area. Once you have identified a few areas of interest, then search under properties for sale <\/a>to find a bargain. A slow market is better than a hot one for price negotiations. Good news: today, the market is slow.<\/p>\n 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\u00a0decision. Here\u2019s a simple example to start with: Once you have found a\u00a0unit within your budget and expectations, determine your type of tenant.<\/p>\n 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,\u00a0there are less fully-furnished units\u00a0in the market. It carries a premium over the empty units. Furnishing a unit will only cost you about\u00a0RM 5,000 or lower. Look for discounts especially during warehouse clearance sales etc. Just search online and you can find many opportunities!\u00a0If you have\u00a0more\u00a0time, classifieds sites for second-hand furniture are\u00a0possible 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.<\/p>\n <\/p>\n Another option is to rent your properties to\u00a0students. To entice them, include a washing machine and a broadband subscription (free internet always works very well!). Bear in mind that this market\u00a0is more price-sensitive.\u00a0You would also need more time to manage it but because you can maximize your earnings by renting out room by room, it\u00a0might be worth it. Looking for a tenant is much easier\u00a0these days. Going\u00a0online 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\u00a0far, I have always been engaging agents to help me because I\u2019m 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.<\/p>\n Coming back to my initial question: why should I proceed even if the rental return is negligible, or even slightly negative?\u00a0Property prices at certain areas have been increasing at a substantial rate. Many property buyers are speculators:\u00a0they\u00a0love\u00a0to buy where everyone else is buying. Let\u2019s assume that\u00a0your 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\u00a0means RM750 per month and 5 years later, you\u2019ve potentially earned\u00a0RM 45,000 in\u00a0capital gain. The average property price increase has always been above 2 percent.<\/p>\n There are definitely loads\u00a0of horror stories about tenants who don\u2019t\u00a0pay on time and refuse to leave.\u00a0My aim is to always look for hassle-free tenants, instead of those who bargain hard<\/strong> <\/em>for a reduction of RM 50.<\/p>\n A few words of wisdom: Build your rental portfolio slowly, and you will soon notice that\u00a0your rental returns will\u00a0turn\u00a0positive.<\/p>\n This story was written by Charles Tan, who writes at www.kopiandproperty.com\/<\/a><\/p>\n