Property Investment 101: Mortgage is RM2000 and rental is RM2000. Rent or sell?

Property Investment 101: Mortgage is RM2000 and rental is RM2000. Rent or sell?

Make your own decision yeah, below is just numbers for your reference

The first thing we need to know if we intend to sell a property is why do we want to sell in the first place. We may need to sell because we need the funds to do other investments. Maybe there’s an undervalued property at an irresistible price. So do go ahead and sell. However, there are people who may think of renting out the unit for a very long time. Their reasoning is that the tenant is paying for the property anyway, why bother to sell? I have done both and I think it’s a decision we will have to make once we have those goals in mind.

What happens then if mortgage is RM2,000 and rental is RM2,000? Are we losing or gaining in $$ sense?

Below would be the typical RM2,000 mortgage per month. 30 year loan period. 10% downpayment. Interest rate of 4.25%. House price around RM450,000. At the end of the 30 year tenure, out of the total payment, 44 percent would have been just interest alone. In other words, the money which will go to the bank. 56% will be principal which is your home price.

On a monthly basis, how much is the interest we paid? At the beginning, we pay a much higher interest portion and a much smaller principal payment. This will gradually be changing until the year 25 where the principal is finally more than the interest. Oh dear… so, should I rent or not?

Here is the actual interest amount out of the RM2,000 mortgage per month. In year 1, the principal payment is around RM6,853.95 divided by 12 months. Monthly that is RM571. Meanwhile the interest is RM17,146.03 divided by 12 and it will be RM1,429 per month.

If the rental we receive is RM2,000 per month, it meant that the tenant has FULLY paid our interest portion and it will include paying some parts of our principal payment too.

Since the principal part will grow every year and the interest part will reduce every year, the tenant’s rental will continue to grow in its coverage of our principal payment every passing year. This is assuming the rental stays the same every year.

Now, if we could increase the rental by just RM50 every year, then we can see the effect becoming even bigger.

This is why landlords become richer with every passing year. It’s a slow process, definitely but it’s a continuous process.

Best would be for the rental to cover the mortgage yeah, everyone knows this

Once upon a time, the rental used to be able to cover the mortgage. Well, I do not think that’s the time currently, unless of course we bought the property many years ago where the price was lower and the mortgage was lower and thus our rental is higher than the mortgage since rental increase would take time.

What has happened was that property price increased too quickly within the years of 2008 – 2013. Rental can only increase every year while property price can increase with every transaction… Once many transactions happen at the higher price, the valuation also goes up and future transactions will be higher.

If prices do not rise too fast, rental would surely be able to catch up again in the future. We shall see what happens. I have no crystal ball to tell me but if we read all the news about property and inflation, we will see that prices will continue to move upwards. It’s just how quickly or how slowly.

Happy investing and please do share your thoughts. Thank you!

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