1. Rental Market Price
While the rental market rate fluctuates, you should always have a benchmark on how to price your unit.
But how exactly do you know what the fair market price is? These are a couple of good referal points to start with.
Real Estate Agencies:
This is the fastest and arguably the easiest way. Surveying is free of charge and market prices will be based on their experience and database.
There are several websites that provides a platform for people to sell/rent their house. You can get a gauge on how much your rental could fetch from similar properties displayed by other owners/agents.
You can also opt to take a drive around your neibourhood and collect as much data as possible. It could be a little off base and target but can serve as a rough estimate.
Now that you have your rental estimates at hand, its time to adjust those prices to one that fits your unit. Prices are based on the facilities and fixtures that come with your unit.
Things that provide added value includes:
- Bathroom and kitchen fixtures
- Freshly painted/Clean walls
- Kitchen amenities included (e.g. in-built microwave)
- Number of parking lots
- Separate/private entrance
- Security (e.g. guarded, community and etc)
- Furnished/Partial furnished/Non-furnished
- View (if it is apartment or condominium)
- Amenities (e.g. swimming pool, gym)
With that in mind, you can adjust prices to reflect a fair market rate for the offerings of your unit.
3. Rented Property Expenses
There are multiple costs involved in the rental market. Part of it to be bourne by the tenant and some by the owner.
The tenant will pay for legal fees and stamp duty while the owner pays for agent fees and commission.
However, those are just the one-off expenses.
In the long run, the owner will also bear the responsibility for the annual maintenance fee of the property which includes expenses for management, legal and accounting, insurance, janitorial, maintenance, supplies, taxes, utilities, loan instalment, assessment and quit rent.
Rental income of owner is also subjected to a flat tax rate of 26%. It is important to note that some of the expenses are tax deductible while some are not. All these factors has to be taken into account before jumping the gun.
4. Cash Flow from Rental Operation
The goal of successful real estate investment is a positive cash flow. Well that and the other benefits of real property ownership and investment.
So, how do you calculate cash flow?
Rental Income – Vacancy and Credit Loss – Expenses – Loan Instalment = Cash Flow
1. Annual Rental Income: RM1,800/month x 12 = RM21,600
2. Vacancy and Credit Loss: 5% (estimate) of gross rental income = RM1,080
3. Annual maintenance fee: RM6,000
4. Loan instalment: RM1,100/month x 12 = RM RM13,200
RM21, 600 – RM1,080 – RM6,000 – RM13,200 = RM1,320 positive cash flow
As long as the investment generates positive cash flow, you’re in a good place.
Rental yield gives investors a clear picture on their expected return on investment which help them in making their investment decision.
From the example of Cash Flow above:
Market Value of Property: RM500,000
-Gross Rental Yield: (annual rental income – vacancy and credit loss)/market value
(RM21,600 – RM1,080) / RM500,000 in % = 4.1%
-Net Rental Yield: (annual rental income – vacancy and credit loss - expenses)/market value
(RM21,600 – RM1,080 – RM6,000) / RM500,000 in % = 2.9%
-Cash-on-cash Rental Yield: (annual rental income – vacancy and credit loss – expenses – loan instalment)/market value
(RM21,600 – RM1,080 – RM6,000 – RM13, 200) / RM500,000 in % = 0.264%
Now to talk about the risks involved. Like every other forms of investments, there are risks to be wary of.
Lets look at some of the risks invovled in the rental market.
For every month you do not collect rent, that is money lost to loan instalments and maintenance.
Tenants that damage your property and do not pay rent can result in some financial losses.
Negative Cash Flow
When your rental is insufficient to cover your costs.
While nothing remains risk free, you can always lower your risks by performing background checks and research to help contribute to a better educated decision.
The rental market in Malaysia may not be as competitive as other countries. You could be hard pressed to find a positive cash flow with the prices of affordable housing rocketing through the roof. However, with the uptrend of housing prices, a surge in the rental market is to be expect. If you are planning to purchase a property to be rented out, don’t forget to utilize our Home Loan Calculator to visualise your monthly installments and other entry costs involved you’re your property purchase. With good research and a good personal finance management, the rental market might just be up your alley.