I love to ask this question to the many listeners during my talks. Which one do you prefer? Higher property price appreciation or higher rental yields? Usually, the answer is I want both. Great answer. Does not happen, sorry. (I know some courses say it is possible. Sure, go and follow that course and do well. No one is stopping you yeah). Coming back to the answer. Price appreciation and higher rental yields do not happen at the same time. At least not within a short period of time. Allow me to explain very briefly.
Property prices could rise with every transaction. In a good market, your neighbour on your left sold his unit for RM400,000. Your neighbour on the right knew about it and sold his unit at RM420,000 three months after. You got to know about it and 6 months after your neighbour on your left, you sold your unit for RM440,000. Property price for the same unit or rather similar unit moved 10 percent within the same year.
In a slow market, your neighbour on the left sold his units for RM400,000. Even assuming the potential buyers know about it and went to view your neighbour on the right’s unit, will your neighbour on the right sells his unit for RM380,000? It depends on whether he could hold or how desperate, right? If he could hold, then it is almost a certainty that the price may actually be the same; RM400.000. If he could not hold, then it has got nothing to do with the market, it’s because of him… Even during good market situation, to sell immediately, he will still have to sell lower…
Now we look at the rental. Your neighbour on the left rented out his unit at RM2,000. The neighbour on the right knows about it, so what do you think the rental will be? RM2,000 lah, similar. When you try to rent out your unit, on the same floor, how much would the rental be if everything is similar? RM2,000 loh… So, within that same year, the rental will be almost the same and is not going to move up just because of different transactions.
What happens the next year then? Maybe, your neighbours could increase his rental by 5%, then you could also increase the rental by almost the same number. If you rental yield was positive from the beginning but a few months down the road, the price increased, what will happen to the rental yield? It will GO DOWN lah. However, if the property price had remained the same for the whole year and the rental adjusts by 5% up, what happens to the rental yield? It goes up a little.
This is why we must really look at the rental yield first before matching it to the property price we are paying. When the property price is too high and the rental is too low, the demand for that property at that price will be slow. If it is NOT slow, then speculative buying is happening. The sale transaction usually happen when the price goes down to a level providing positive rental yields. This is why rental yield should be a good determinant for property price. It’s not just how much the developer is willing to discount for you, today.
Next suggested article: When rental units become the norm in the future