Apr

Should I be Investing in This Property? – How To Determine Good Rental Investments

Let’s face it, as a property investor ourselves we have one question in our minds: how do I know if the property I want to invest in will be profitable? Is this the way of exploiting my investments and securing cash flow for the future? Well fret not, here are some ways to determine a good rental investment.

First things first, you need to decide on where you want to invest. A lot of new investors often want to purchase rental properties around their area. Which means the same area as their current home, the same city or even the same state. It all depends on the market’s price of the area you live in. You may not get a constant cash-flowing rental property if the area you live in where its property value belongs to the higher end of the market. Consider an area whereby it has potential for job and population growth. After deciding on the area to invest in, look into that area on a micro level. Determine a specific postal code to target while considering a few points in the following:

The average property value/rent
It’s crime rate
The demand for housing – future developments that will increase demands
Specialised market – working adults, students
Nearby to transportation links – LRT, MRT, KTM, BRT, bus stops, etc

For example, according to Property Guru, Sentul is a hot market place that is slowly gaining interest of property investors because of its close proximity to the city centre. Although previously it is known for its high crime rates, Sentul now has high rises which are easily accessible via public transportation.

The 1% Rule

Calm down, this is not a complicated equation. The 1% rule is simply a rule that investors usually use to help them short-list their choices rapidly. It is simply a tool that you can use to determine if a property deserves your investments. (Note that it may not apply on every property and it is only an estimation to 100%-ly avoid any loss on your investment. The next point in this article explains it all.) It is safe to say that the 1% rule means that a property should be rented for 1% or more of its total upfront cost. For example : a property that costs RM 250,000 should be rented for at least RM 2,500 a month. Remember that we said that it should be rented for 1% or more of its total upfront cost? Meaning to say that you should add up together the total purchase price and the estimation of the total renovation/repair cost needed to make it presentable for renting.

(If your RM 250,000 property needs RM 50,000 worth of repairs and renovations, you need to rent for at least RM 3,000 a month, not RM 2,500)

If your property passes the 1% rule, you can consider it. HOWEVER, just because a property is aligned with this rule does not mean it is a good investment. Likewise, if a property that falls below the 1% rule, it does not mean it is a bad investment as well. On the contrary, if a property falls notably below the 1% rule, it is a clear sign that you should give up on that particular property.

Calculating Your Rental Yield

A clear insight on calculating your ROI.

As an avid property investor, I find calculating the rental yield super useful. Rental Yield is a term whereby it is your ROI based on the cost of your investment. You will have an idea on whether your investments are growing. You should know that there are 2 types of rental yield – gross rental yield and net rental yield.

Gross Rental Yield

As a starter, you will need to have your – annual rental income (monthly rent x 12 months) and also your property value. And once you have those figures, you may start calculating as follow:

Gross Rental Yield = (Annual Rental Income / Property Value) x 100

For example, your property cost RM 300,000 and you have decided to rent out for RM 1,500 a month. Your potential gross rental yield is of 6% ( Malaysia’s average rental yields are between 2.3% – 5.4%. A rental yield of 4% or more would be considered good in Malaysia ), which is high, which also means it is good enough.

Net Rental Yield

Net Rental Yield is a more precise estimate on your ROI. Other than your annual rental income and the property value, you also need to include the annual property cost (for eg: legal fees) and also costs that you will be paying in the long run (for eg: maintenance fee) .

You may list out all to have an accurate calculation. And again once you have those figures, you may start calculating as follow:

Net Rental Yield = [(Annual rental income – Annual expenses) / Total property cost] x 100

Let’s say again your property cost RM 300,000 and your monthly rent is RM 1,500. Your annual property cost is RM 400,000 and the annual expenses that you are paying in the long run are RM 8,000, your net rental yield is 2.5%. Try comparing with your gross rental yield, you may see the big difference.

As an overall, investing in rental property is lucrative. That being said, you will have to do more thorough research and hold the knowledge of investing in good rental property to generate your income. Talk to us today about property and we will gladly assist you!

About Us:

SHR Properties is a real estate company which offers comprehensive services including real estate property investments, development, sales, marketing, operations, and management. The company creates quality urban projects based on customer-oriented mode of management for a better living and working environment. They also provide professional expertise and resources, along with asset management risk analysis and other services.