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Property investment? Buying and renting is a good long-term strategy.

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This article first appeared in Malaysia’s leading property portal PropertyGuru.com.my’s property newsletter, July 2015. 

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 if the rental could barely cover the mortgage and the maintenance charges. From an investment point of view, my answer is a yes. Of course, if we have to keep paying for the ‘losses’ every month, it is not recommended. Let me share why and how.

Why? Let’s look at a bigger picture first. Greater KL / Klang Valley’s property market continues to be vibrant because urbanization in Malaysia continues to happen. According to Economic Transformation Plan (ETP), Greater Kuala Lumpur is envisioned to have a total population of 10 Million by 2020. Today, Greater Kuala Lumpur has an estimated total population of around 7 million. Based on a ratio of 4 to one home, this meant that just from the new population of another 3 million, another 275,000 homes are needed. We have yet to calculate the demand from the existing population, many of whom has yet to own a place of their own. Consider just 50 percent of this new population has to rent for the first few years. Let’s proceed, shall we?

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 and most of the time, the income is not likely to be giving a positive return within the first 12 months. Check property portals like propertyguru.com.my to know the typical rental for 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. 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 more systematic decision. You may still be wrong but this is better than deciding based on emotion. Here’s a simple example to start:

chart

Once you found one 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. The reason is because this type of property is lesser in the market. It carries a premium as well over the empty units. Furnishing a unit is likely to be just RM5,000 or lower. Look for discounts especially during warehouse clearance sales etc. Just search online and you can find many of such sales in Greater KL. If you have lots of time, then classifieds sites for second-hand furniture may also be possible. A few years ago, I managed to buy a second-hand two-door fridge for RM550. 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 long-term.

Another choice may be students. For this market, a bare unit with fans and sufficient lights should be sufficient. The students would definitely be buying their own study desk, a bed and other must haves. To entice them, include a washing machine and broadband subscription. For this market, it is more price-sensitive and thus it would be easier to rent out semester after semester if you do have something extra for them. For this market, you would need more time to manage it but because you can maximize the unit by renting out room by room, it is still worth it.

Looking for a tenant is easy these days. Think online. If you are confident, you can definitely do it all by yourself too. It is however good to engage an agent so that everything is in order. Thus far, I have always been engaging agents to help me because I do not have the flexibility of time. I may not be free to always bring potential tenants to view the unit. When you engage a good agent, they would soon become friends. You may even get to know some good deals from them too.

Coming back to why I would proceed even if the rental return is negligible or even very slightly negative, it’s simple. Property prices in certain areas have been increasing so much that the rental returns in these areas would definitely be negative today. However, the appreciation for these units may still continue because buyers are very funny. We LOVE to buy where everyone LOVES to buy. Oh yeah, in numbers it is still worthwhile.

Assuming your rental barely covers your rental and your property is RM450,000. If the property price increases by just 2 percent per year, what would be potential capital gain at the end of 5 years? Well, RM450,000 x 2% = RM9,000 per year. This is extra RM750 per month and 5 years later, it’s at least RM45,000 potential capital gain. The average property price increase has always been above 2 percent. Search online for information or buy Ho Chin Soon’s books. Of course, the above assumes no unforeseen circumstances happen. If we want to save instead, how many of us can safely say that we can save RM750 per month easily.

There are definitely lots of horror stories about tenants who refused to pay and refused to leave. However, I can safely tell you that after having been a landlord for more than 10 years, these can be minimized to minimum. My aim is always tenants who love hassle free fully furnished units instead of those who bargained hard even for a reduction of RM50. When we do not cut corners in furnishing the unit attentively, there is little need to cut the rental. Build up your rental portfolio slowly and you would notice that soon, your rental returns would be positive. Come on, rental would always increase year after year BUT the price you paid for your property many years ago remains the same years later. Be a good landlord to your tenants. They will make you rich. Happy buying and renting.

Next suggested article: Rental is softening. Good news I guess.

 

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