Maximizing Your Rental Return

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Mathew and Marisa are looking to invest in a property. This will be their first investment property. Like many other homebuyers, they have done their research online and at some property seminars. They figured that a 2-bedroom apartment in a good location, priced below RM650,000 would be the ideal investment for them. Like all investors, they want the best rental return so they hunt for an apartment in a few good locations with the cheapest selling price. Eventually, Mathew and Marisa shortlisted 2 apartments in a condominium complex.

The first apartment is priced at RM550,000. It is on a low floor with not much of a view but the price is at least 10% below market. The seller urgently needs funds to expand his business and want to sell quickly. The 2nd apartment is priced at RM610,000. It is on a very high floor, offers a spectacular view, and has better interior decor.

It is a difficult choice. Mathew believes that it is better to buy an undervalued asset and Marisa feels they’d have better luck renting out the 2nd apartment. Who do you think is right? What would give them the best rental return potential?

 

Rental Synergy

All too often, rental price is derived from the purchase price of the property. Investors think about pricing their rent at a minimum threshold that covers their home loan repayments.

While it is only fair that you aspire for your rent to cover your monthly installments and give you some profit, you should not be deriving your rental rate from the purchase price. It should be the other way around. You need to understand the demographics of the location you are buying into. What type of people does it attract? Can these people afford to pay the type of rent you are demanding?

If the rental price and the location is a mismatch, there is no synergy. Take Mont Kiara and Segambut for example. These two places are right next to each other. You would be pressed to find a tenant for RM6,000 a month in Segambut area but not in Mont Kiara.

So, it could be dangerous to buy a RM1,000,000 apartment in Segambut but rather safe to buy the same in Mont Kiara. Other components that come together to provide synergy are quality of property, size, aesthetics, interior design, amenities, and facilities. It therefore makes a lot of sense to look for properties that maximize these synergistic effects at the lowest price.

 

Professionalism

In his magnus opus, Think & Grow Rich, Napolean Hill says, “there is but one dependable method of accumulating, and legally holding riches, and that is by rendering useful service. No system has ever been created by which men can legally acquire riches through mere force of numbers, or without giving in return an equivalent value of one form or another.”

If Mathew and Marisa in the example above want to become investors, they should do it professionally. This includes acting like professional landlords. When they do this, they start providing value for their tenants. This creates goodwill, and encourages demand for their properties. Being a professional landlord means furnishing your property with finesse. It means setting aside funds for improvements and regular maintenance. It means having your property looking crisp and clean when prospective tenants view it.

A few years ago I had a client who wanted to rent her studio apartment, which had been vacant for 8 months. When I visited the apartment, I could see why. A thin layer of dust covered the whole floor. The bed was bare and there was a stale musty smell assailing my nostrils.

After 2 months of trying to rent it out for her, I suggested that we do a thorough cleanup, put sheets over the bed and pillows, and spruce the place a little. She was not convinced it would make a difference but eventually succumbed. We even changed the curtains. The apartment was rented out less than 2 weeks later.

You see, professional landlords have better occupancy rates.

 

Knowing The Science Behind Yield

Remember Mathew and Marisa’s dilemma earlier? Lower price does not necessarily translate to better yields. Occupancy rate can affect your rental return substantially.  Occupancy rate is the number of days in a year that an apartment is occupied. If it takes you 30 days to find a new tenant every year, your occupancy rate is 91.67%.

If past history shows that the 1st apartment has an occupancy rate of 85% and can fetch a rental price of RM2,000, the annual rental return is 3.71%. On the other hand, if past history shows that the 2nd apartment on the higher floor with better furnishing has an occupancy rate of 92% and can command a rental price of RM2,100, the annual rental return is 3.8%.

Although the 2nd apartment has a higher price tag, it gives better returns and therefore better resale prospects.

Cost is another aspect that affects your rental returns. All other things equal, a cheaper property with higher costs can have worse investment performance than a more expensive property with lower costs.

To maximize your rental returns, you should always factor in occupancy rate and costs into your calculation.

 

Putting It All Together

Maximizing your rental returns starts from ensuring that you pay the right price for your rental property. The “right price” is a value proposition and can differ from location to location or between product offerings. Then, you need to treat your investment like how you would a business. It should be systematic and professional with commitment towards improvement.

Finally, you must understand how occupancy and costs affect your rental return. A property with better occupancy and lower costs can provide better returns than a cheaper property with lower occupancy and higher costs.

Source: iProperty