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Buying few years earlier, yield should follow later. (should, not guarantee)

When the market is hot, property prices could rise with every transaction. Your neighbour on the left told everyone he sold his unit for RM500,000. Suddenly that next transaction 2 weeks later could have been RM520,000. Another 2 weeks later someone said that another unit has been sold for RM540,000. When the market is hot, these may just be the situation. However, what about the rental for these units? Even if the prices kept going upwards? Let’s look at this conversation:

Owner: Dear tenant, I am calling you to tell you that even though we signed a one-year tenancy agreement just 2 months ago, I have decided to increase your rental starting next month.

Tenant: Huh??!!

The situation above does not happen frequently. In fact, I have not heard of any awesome owners who kept increasing their rental every other month! By the way, this is why rental yield can suddenly turn negative even if it was positive just a few months earlier. Rental could not change within months but property prices could.

So, what happens then when the whole property market slows down and there are a lot more owners willing to rent their units at rents which are even lower than their mortgages then? We have an even more negative rental yields. Are these owners crazy then? Actually, far from it. They are objective. Assuming their property was RM550,000 in value and their monthly mortgage payment plus maintenance fees (RM200) come to RM2,550. If they could rent out their units at RM1,800 then they will lose RM750 per month. If they did not rent out their units for a very tempting monthly rental, then they would have to pay the whole RM2,500 by themselves! 🙂

What happens then if we are to enter the market today to buy a good property? Well, instead of selling their properties at RM550,000 some owners may be willing to sell their properties at RM450,000 instead. Some even lower if they are more desperate. For new owners who now own a RM450,000 unit, their mortgage plus maintenance fees may come to RM2,133 per month. Assuming rental is still RM1,800 then the negative is down to RM333 per month.

Source: calculator.com.my

I remember long time ago, I used to rent out my whole unit for RM650. My condo in Kelana Jaya was RM1,200. These days, RM1,800 is quite common. What happens in the future is that rental will just rise slowly over the years. When property price remains the same, rental yields will slowly turn to positive. It has happened to my condos in Penang, Sandakan and Kota Kinabalu. What happens if property prices inches up again then? Then we get capital appreciation but lower rental yield then… This is the world of property investment and rental yields.

REMEMBER THIS. If we bought an overpriced property, then nothing positive happens yeah. if it’s for own stay, still okay. Happy understanding.

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Next suggested article: Timing and attractiveness always two favourite questions

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Charles Tan The Founder The Writer Kopiandproperty
Charles Tan

Charles is Founder of kopiandproperty.com He writes from his investment experience for the the past 20 years in investments including property, stock, unit trust and more as well as readings and conversations with many property gurus in the industry. kopiandproperty.com is an independent property blog which is not affiliated to any media company, property developer or even real estate agencies.

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