One of the most common forms of property investments is property leasing, a source of income that dates back many centuries.
Due to its long-term yet stable mode of income, the rent that a property owner receives every month could mitigate or even offset the monthly instalment on the mortgage for the property partly or in whole. Hence, leasing out a property is a good strategy for owners to gain some returns on their investment while waiting for the property’s value to appreciate in the future.
This is particularly true for Sarah, who purchased a 3-bedroom apartment unit with an area of 850 sq ft in Bayu Puteri Apartment, Tropicana, 18 years ago for RM150,000, which was equivalent to RM176 per square foot (psf).
“I don’t know much about investing. At that time, I was just accompanying a friend of mine to explore properties. Then I was attracted by the location and facilities of Bayu Puteri Apartment, so it was somewhat of a coincidence that I bought this unit for investment,” she said.
She then leased out the entire apartment for a monthly rent ranging from RM900 to RM1,800 over the years to different tenants.
“I appointed an estate agent to handle everything for me, so I don’t have to worry about it,” she added.
Although she still needs to pay for the maintenance fees, quit rent, assessment, and the cost to repair or replace appliances that came with the apartment, Sarah was able to pay off the housing loan for the property with the rental income she received in 18 years as the monthly instalment was only about RM800.
“I’m glad that it turned out to be a good investment. I heard from the agent that the apartment has a market value of some RM350,000 today, which translates into a capital gain of approximately 133%,” she said.
Rental investment can be a smart way to earn passive income while waiting for property values to appreciate. But before you jump into it, let’s take a step back and take a look at the big picture and see if a rental investment is suitable for you.
Step 1 : Find Out How It Works
A residential rental investment is a straightforward strategy where an individual or investor purchases a property with the intention of renting it out to tenants. The primary goal is to generate rental income while also potentially benefiting from the property’s appreciation in value over time, known as capital growth. The profitability of the investment depends on various factors, including the type and location of the property, market conditions, and the profile of the tenants.
If executed correctly, a rental investment can be a relatively safe and straightforward approach, providing a stable source of rental income while waiting for the property’s value to increase. Long-term ownership of the property can lead to significant returns, but it is crucial to maintain and upkeep the property adequately to prevent its value from declining.
As the landlord and property owner, one must take responsibility for addressing any issues that arise with the property or the tenants. This could include dealing with repairs, replacing broken items, recovering damages to the property, and handling defaults on rental payments, among other responsibilities.
To ensure clarity and protect the rights of both landlords and tenants, a tenancy agreement is essential. This agreement should outline all the terms and conditions of the rental arrangement, including details about the landlord and tenant, the tenancy period, the rental rate, and the fixtures and fittings provided within the unit, among other relevant information.
It is worth noting that managing a rental property can be time-consuming and requires a level of commitment from the landlord. Some landlords choose to hire estate agents to handle the property management aspects on their behalf. However, regardless of whether the landlord takes on the management responsibilities themselves or appoints an agent, maintaining a well-kept and desirable property is vital for maximising returns on the investment.
Step 2 : How To Find A Good Property
According to various experts in the property investment field, the rental yield is a crucial factor in determining whether a property is a worthy investment or not. Here are some key insights and recommendations provided by these experts:
- Rental Yield Thresholds: The gross rental yield for properties can vary depending on whether they are landed homes or non-landed residences. Generally, for a landed home in the Klang Valley, the gross rental yield can range between 2% and 4%, while for a non-landed residence, it can range from 4% to 6%. However, an excellent rental property should offer at least 8% gross yield to be considered a worthy investment. This is because various costs, including monthly instalments, quit rent, assessment, and other expenses, are likely to account for around six percentage points of the gross returns, leaving a net yield of only 2%.
- Property Hunting Strategies: To find properties with high rental yields in the current market, investors may need to be committed and screen through a significant number of listings. The secondary and auction markets are good places to hunt for potential buy-to-let investments, as they offer more certainty regarding the property’s condition, prices, rental rates in the neighbourhood, and the profile of existing residents or tenants. Investors may also consider purchasing properties with existing tenants, as it allows for immediate rental income and the possibility of renovations or furnishing to improve rental returns.
- Suitable Property Types: Low-rise walk-up flats and apartments priced between RM300,000 and RM400,000, and located close to amenities and public transportation, are recommended choices for rental investment properties. Such properties are more affordable for the mass public, making them attractive to potential tenants. Additionally, low-density projects with no more than 200 units are considered favourable options.
- Location and Developer’s Reputation: A property’s location plays a significant role in attracting tenants, particularly those situated in prime areas or neighbourhoods with constant community engagement activities. Properties in areas with growing industries can also be promising investment opportunities due to increased demand for housing from the workforce in that sector.
- Targeting Student and Expat Markets: The student and expatriate markets are among the best markets for rental investment. Properties located in education hubs like Subang and other areas with a high concentration of students can be lucrative. Similarly, areas like Kuala Lumpur city center, Mont’Kiara in KL, and Bukit Indah in Johor are attractive to expat tenants willing to pay higher rents for suitable accommodations.
- Case Study: An example of a successful rental investment is a 2-storey terraced house in Desaru, Johor. The house was bought for RM380,000 and is leased out for about RM4,000 to RM5,000 per month, resulting in a rental yield of approximately 12%. This significant rental yield is attributed to the booming oil and gas industry in the area, creating a demand for housing from workers in that sector.
Step 3 : Good Upkeep = Good Income
Potential property investors should be aware of the challenges and responsibilities involved in becoming a landlord and getting decent capital gains on a rental property often requires a long-term commitment. Landlords need to ensure the property is well-maintained and deal with various tenant issues, which can be demanding and time-consuming.
Many people think it is an easy job to be a landlord and maintain a rental property or address a tenant’s problem. But the fact is, many got so fed up with the challenges of being a landlord that they eventually let go of their property even at a loss. Hence, be prepared and be aware of the challenges as these are part and parcel of investing in a rental property
Be cautious against being driven solely by the desire for quick profits and warn against buying property based on speculation. Relying on assumptions that property prices and rents will always increase can lead to financial losses and stress if the market doesn’t perform as expected.
Upkeep of a property is crucial. Let’s say you are buying a completed stratified property for rent — you must find out the rate for the maintenance fees. If a lot of the owners are not paying, the condition of the property will not be good going forward, thus lowering its appeal to prospective tenants or buyers. Neglected properties with poor maintenance can lose their appeal to potential tenants or buyers.
In conclusion, the advice for aspiring property investors is to be well-prepared and informed about the challenges they may face as landlords. Diligence in property management and avoiding speculative buying are crucial aspects to ensure a successful and profitable investment in rental properties.
Please remember that this information is general in nature and does not constitute professional financial or legal advice. Before making any significant financial decisions or entering into any agreements, it is essential to consult with qualified professionals who can provide personalised guidance based on your specific situation and local regulations.
