Read this first if you intend to let your property out as an investment
For property investors, the most practical strategy would be to rent out the property to minimise transaction costs and put the property to ‘work’ immediately. This will defer holding costs and other expenses incurred, especially while executing the purchase of the property concerned.
Once a property has been purchased, investors can look forward to reaping short-term benefits by renting out their properties, while also benefiting from the capital appreciation of their properties in the long-term.
There are four options once the property has been legally purchased; occupy the property, leave it empty, engage a caretaker, or put it on the rental market. Renting the property is a favourite approach as it facilitates the mortgage repayments for the property in the short-term, while waiting to reap the benefits of capital appreciation on the property.
By holding on to the property, investors can avoid paying taxes, commissions, legal fees and other incidentals, which combined together, can run into a considerable amount of money. In terms of the rental yields, the rule of thumb is that the more properties rented out, the more the financial gains.
Renting out investment property has numerous short-term benefits that investors can capitalise upon; including earning regular residual income, having the tenant responsible for the upkeep of the property, tax breaks and a strong net worth in the long-run.
In Malaysia, rental income is under Section 4D of the Income Tax Act 1967. It is therefore taxable, and has to be declared. However, investors can deduct most of the expenses incurred in maintaining the property. These include repairs made to maintain the property, commissions paid to agents, quit rent, assessment tax and also the interest portion of the mortgage.
In order for the formula to work successfully, investors have to carefully vet through potential tenants, before choosing tenants who conform to three basic criteria: Their capability to pay regularly on time (preferably through a standing order on a bank account), handle minor repairs individually and willingness to upkeep the property as their own
For a successful relationship with the tenant, the first rule is to ensure that a tenancy agreement is signed, registered and duly stamped. A standard Tenancy Agreement stipulates that the tenant is obliged to pay two months’ rental in advance, as a security deposit - and a specified amount as a utilities deposit - to be returned to the tenant upon the termination of the Tenancy Agreement.
The Tenancy Agreement should also include a list of fixtures and fittings (such as air-conditioning units, ceiling fans) provided and any other furniture provided. This is also commonly known as the `property inspection checklist’. Hence, in the event that the items are damaged, the onus is on the tenant to replace the items upon termination of the Tenancy Agreement. It is important to remember that the Tenancy Agreement is for the benefit of both parties concerned and should be irrefutable.
Generally, the less furniture provided, the less complicated the Agreement. This also provides the tenant the liberty of furnishing the property to his likes and dislikes, which ultimately means that the tenant will take good care of his belongings – and the property.
Foreign investors can employ of the services of property managers or real estate agents who will be responsible for screening tenants and to ensure that the proper documentations are in place.
Once the tenant occupies the premises, investors can reap the benefit of rentals and make the property `work’ to repay the capital investments incurred.
“Once the tenant occupies the premises, investors can reap the benefit of rentals and make the property `work’ to repay the capital investments incurred.”