Rental properties have long been seen as a good opportunity for investment property. But it’s not without its risks.
The central goal is to invest your finances into a property that provides a positive return on investment over time.
Of course making money is never a guaranteed thing, which means any rental investment must involve informed decisions and a good understanding of the market environment.
Let’s start with your return on investment, or ROI. There are two main forms of financial gain from buy-to-rent homes:
- Rent: This is the most obvious income stream from a property you’ve bought to rent. Rental payment provides a steady flow of income over time.
- Capital: While your rent is (hopefully) flowing in, the right property will also be enjoying capital appreciation. That means your original investment increases in value as the value of the property itself increases.
First up, understanding rental yield!
Fundamental to a good investment is understanding the concept of rental yield. Rental yield measures the income you gain from your rent annually as a percentage of the total price you paid for the property itself.
Our rental yield calculator guide provides a simple explanation of this vital concept. But let’s just explore one easy example for further clarity:
You pay RM200,000 for a house. You manage to rent out this house for RM10,000 annually.
Your rental yield would be the rental figure (RM10,000), divided by the total cost (RM200,000), then multiplied by 100 to make a percentage. So your rental yield is 5%.
Rental yields can vary wildly by property type, location, and area. However, in general terms, a rental yield of 4% or more would be considered good in Malaysia.
Now, on to interest rates vs rental yields
One thing to remember when you’re purchasing an investment property for rental purposes is the potential battle between interest rates and rental yield.
While a select few people are lucky enough to have the cash reserves to pay for property without a loan, most people are not. That means a home loan is often required to fund the purchase of buy-to-let properties.
It’s essential to factor in the potential interest on this home loan against the rental yield. If your home loan interest is on a variable rate, there’s a chance the interest rate could increase above the rental yield, and significantly impact your return on investment.
How to maximise ROI on a rental property
There are a number of ways you can help maximise your return on investment for rental properties.
1) Choose a cheaper property
While it might be tempting to buy a luxury condo for your first rental property, an affordable apartment may very well be a better choice.
While the total value of rent may be lower, due to the desirability of the rental property, the rental yield itself could be far more favourable.
2) Buy in a favourable renting area
With changing lifestyles, there’s no doubt that living in rental properties is an attractive proposition, particularly for younger age groups.
That means rental properties in areas that are favourable with younger demographics could be a smart choice.
That’s particularly true of areas with reliable short-term populations such as educational hubs and near major universities.
3) Don’t buy a fixer-upper
A fixer-upper is a great house purchase for an investment property in which you live, but the scope of work required to turn a property into a rental property is almost certainly not worth the hassle unless you’re a professional with prior experience.
4) Think about steady income
Rental yield calculations are based on the amount you earn in a year. Monthly rental income from short-term lets can be higher, so it’s worth considering, but be aware if you’re only renting short-term you can’t always guarantee that figure will be steady.
It may be smarter to take a slight decrease on rent to encourage a long-term tenant than keeping the rent high and missing out on several months of rental income.
5) Make it look good
Don’t forget to market your property as well as you possibly can! That means make it clean and smartened up, add a good variety of photos that show it in a positive light, as well as be receptive to providing more information if a potential tenant wants it.
6) Plug the gaps with holiday rental
Short-term holiday rental can be a quick-fix solution if you’re without a tenant for a period of time.
This option lacks the steady reliability of a proper leasing arrangement, but if it doesn’t breach the laws of your residency, state, or building, then a short-term holiday rental could ensure an income when tenants are scarce.
7) Consider buying something nearby
If you’re buying a single rental property as a family investment, consider buying something nearby that allows you to tackle any problems directly yourself.
This could save you significant money with things like small repairs and fixes in the long run. This should be weighed up against other considerations noted above.
Hidden costs in rental properties
With an investment property it’s important to understand all the cost calculations to make an informed decision. But often, rental properties can come with hidden costs that people don’t expect/aren’t aware of.
- Listing costs: Unless you’re renting direct through word-of-mouth, you’ll probably have to pay listing costs.
- Agent costs: Professional agents know the right places and right ways to market your property. But like any professional, they want to be paid.
- Maintenance: Unfortunately, things break. A second home for rental purposes also means twice as many things that could require fixing and maintenance.
- Insurance: You don’t just need to buy the property, you need to insure it too. You don’t want your investment going up in smoke in the event the worst happens.
- Tenant risk: There’s always the risk that your tenants turn out to be your worst nightmare. Most people should treat your property with love and respect, but it’s wise to factor in the possibility that you may need financial backup to repair damage caused be a renter.
- Tax reporting: Don’t forget that rental income is a taxable income. Make sure and report your rental income to avoid future costs down the line.
- Building maintenance: It may be that building maintenance is factored into your rent, but don’t forget that changes or adjustments to these costs can impact your bottom line.
Smart expectations for renting property
Renting property is a transaction that’s quite different to any other. Not only are you trusting a potential stranger with a valuable asset, that stranger is also trusting you as a landlord to provide them with a safe, stable home.
It’s only normal that you’re both eager to get the right fit when it comes to a rental. If you’re using an agent, you should stress to them the kind of tenant you want to fit your property.
There are also some other smart steps you can, and SHOULD, know about on the path to renting.
1) Tenancy agreement
A tenancy agreement provides security for both landlord and tenant. These simple documents provide a legal framework that set out the duties and obligations of each party in a rental agreement. They are an essential part of smart renting.
2) Security deposit
A security deposit is standard practice in the rental market. This amount provides security for you as a landlord against a tenant vanishing without paying rent, or causing damage to the property.
3) Landlord insurance
This is both a potential cost, but also a huge cost-saving. There are landlord insurance products available in Malaysia today that remove some of the risk of negative tenancies. You should consider these as part of your rental setup.
4) Clear communication
Establishing good communication is another important step in setting up your rental agreement.
Make sure you, the agent, and the tenant know the right lines of communication for any problems or discussions that need to take place.
5) Legal demands
It’s important to know your legal rights. In the unfortunate event of overdue rent, you must make a formal request in writing which clearly states your demands in order to kick-start any legal process.
Hopefully you won’t need this knowledge, but better to have it and not need it than the other way round.
One final point to note – the evolving legal situation regarding rental in Malaysia. Currently the nation’s rental laws are somewhat disjointed, and legal precedents offer the primary guideline for disputes around rental property.
That can create challenges around disputes on payment, affordability, and even eviction. The upcoming Residential Tenancy Act is set to change that, laying out more formal regulation to benefit landlords and tenants alike.
Taking a step back from the legal situation, buying an investment property for rental purposes can be a smart way to build for the future. Like any good financial investment, there are no guarantees.
But one thing is certain – the more you know, the better equipped you are to make the smart choice for you.
If you found this article helpful, we’d recommend you to read up on how to spot a great property investment opportunity. Who knows, you could very well be on your way to becoming the next property tycoon! 😉
Disclaimer: The information is provided for general information only. PropertyGuru International (Malaysia) Sdn Bhd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.