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What I Wish To Know Before Making A Buy-to-let Investment

WHAT I WISH TO KNOW BEFORE MAKING A BUY-TO-LET INVESTMENT | Recently, the Finance Minister II was quoted as saying that the younger generation are better off renting than buying properties in order to avoid long-term debts. In spite of this, property investment is far from dead.

Before making any buy-to-let investment

However, there are always opportunity to purchase such buy-to-let investments for potential investors. One good example would be the new Grid Residence in Iskandar Malaysia. The potential of the Residence as a buy-to-let type of investment is high compared to few of the counterparts or options available in the market. Below are the few tips that could be used to help investors decide whether they should commit to an investment or wait for better opportunities in the market.

What Should I Know Before Making A Buy-to-let Investment

1. Choose the right property type
  • What is the right type of property that a potential investor should buy? In terms of capital appreciation, a landed property would always have a higher total appreciation in general compared to high rise such as condominiums and mixed development such as Grid Residence Iskandar.
  • Landed property could generate a better appreciation in terms of overall capital appreciation while condominiums and mixed developments are famed for high rental yield. It would be easier to rent out a condominium or high rise compared to landed houses for example. Condominiums comes with facilities and amenities to attract potential tenants to rent instead of landed properties which can be rather plain in comparison.
  • For investors, they would need to decide whether high rental yield obtained from renting is something they prefer after deducting the total expenses cost to maintain and manage the property. With the recent advancement in advertisement and marketing, landlords and investors could easily seek around the average asking price for rental for the said property.

2. Calculate your potential gain from rental
  • Yield is a measure of how much cash an income generating asset produces each year as a percentage of that asset’s value. It’s calculated differently depending on the type of asset (i.e. property, shares, etc.) and is a useful measure for investors with a diversified portfolio to compare asset classes and their performance.
  • For real estate, yield is the rental income as a percentage of the property’s value. It can be calculated as a gross percentage, before expenses are deducted, or as a net percentage, with expenses and purchasing or transaction costs accounted for. Gross rental yield is most commonly used as it allows you to easily compare properties with different values and rental returns. It can be expressed as a percentage of the property’s market value or purchase price, so make sure you’re comparing apples with apples. 

So, How Do You Calculate Your Return On Investment (ROI)?

There are two components to this ;
a)  Rental yield per annum : percentage return of rental income from the property excluding the expenses incurred from property maintenance against the total purchase price of the property.
  • Here is an example on how to calculate this; let us assume you purchased a property for RM750,000 inclusive of all related costs. You receive rental income of RM4, 800 per month and incur total expenses of RM6,400 per year to maintain your property.
  • Thus, the Gross Rental yield is calculated as ;

          RM4,800 x 12 = RM57,600 per annum rental income
          (RM57,600 / RM750,000) x 100 = 7.68% per annum

          The Net Rental Yield is calculated as;
          (RM57,600 – RM6,400)/RM750,000 x 100 = 6.83% per annum

If you take an interest-only loan of RM500,000 to finance your property and the financier levies an interest of 6% per annum fixed for the entire financing tenor, then the loan will be repaid on its financing maturity or when the property is sold if that occurs earlier. Annual interest rate is RM30,000.

b)   Net Leveraged Rental Yield : this takes your property financing in account when calculating the rental yield. Your capital cost is the difference between your purchase price and your borrowing, for example, RM750,000 – RM500,000 – 250,000.

This is calculated as (RM57,600 – RM6,400 – RM30,000)/RM250,000 x 100 = 8.5% per annum.

3. Manage your investments
  • After deciding your type of property and taking into account the amount of potential rental yield for the property, it is now time to consider a serious aspect in managing the investments. Most landlords would prefer to manage the property themselves for maximum cost efficiency compared to delegating the job to an experienced agent or similar.
  • In fact, at today’s market, there are properties being sold together with rental management service by the developers. You just need to sit back, relax and make monthly repayment to your property while the appointed agency manages the investment for you. Self-management of the said property could prove to be troublesome for some owners.
  • You will need to put aside time, work and energy in order to manage the property. There are a lot of works involved in the process from advertising, procuring a tenant and managing the tenants. You would need to bring the tenants for viewings and to answers all their questions. After negotiating and agreeing to general terms and conditions for the property, you would need to draw up a tenancy agreement.
  • Finally, you would need to ensure your tenants will pay the rental in a prompt and speedy matter every month to prevent any potential chance for them to default. In addition, properties such as condominiums and mixed developments usually have managements fees and etc to pay. As an owner, you would have to ensure that all payments are made in time in accordance to the management to prevent your tenants to be having any issues. Finally, you would need to manage any miscellaneous issues such as repairs and maintenance for the said property. All this hassle could be saved if you hire a professional agent to manage their said investment for you.

4. Know your market
  • Investing in a property for a buy-to-let scheme needs the potential buyer to be aware of their target market.
  • For example, buying an area with students would probably yield an above average yield of rental if compared to normal areas with average populations. Buying into an area with expatriates and others would also offer a different rental yield. Expatriates usually have a healthier budget in renting and they can usually afford to splurge compared to people with family or students for instance. Having the right market and target for your property could yield a better than average return. You do not want to be making the mistake of trying to rent out an upscale development somewhere close to town to potential tenants such as students and average middle-class workers as they would probably not be able to meet your demand in terms of rental.

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