|If Mr Rama took what the market offered: A tenant offering RM1800 on 1 January
|If Mr Rama got what he wanted: A tenant at the 6th month for RM2500 on 1 July
|12 months in a year X RM1800
|6 months remaining for the year X RM2500
|Smart (emotionally detached) landlord
|Loss of rental income of (21600 -15000) = RM6,600
Here’s the down-low on everything you need to know about investing in a rental property and leasing it out to make a tidy profit in Malaysia.
Have you thought about raking in some cash via passive income streams recently? It is not uncommon for every other man on the street to have a side hustle nowadays, and property has always been a long-time favourite. If you are looking to invest in a rental property in Malaysia but you are unsure of where to start, look no further.
In this article, we will answer all your burning questions and share the latest info on the related law and legislation, investment advice and pro tips provided by two real estate professionals, who have a combined experience of 26 years – Real Estate Negotiator Varsha Poptani who specializes in residential property and her son who followed in her footsteps, Probationary Estate Agent and Property Manager, Kelvin Poptani.
Let’s dive right into it.
Is it a good time to invest in rental property in 2022?
On the surface, it feels like the property purchasing sentiment is pretty low, as the country is still recovering from the severe implications of Covid-19. However, do not be discouraged! Property investment has the potential to be profitable even in challenging times. However, it is vital that you purchase the right property at the right time and ensure that it fits your financial profile and is able to cater to your target tenant. Our expert, Kelvin gives one example here: “Utilizing the current low-interest rates while strategically planning for renovations could provide certain tax exemptions and this will likely reduce the impact of an unstable economy.”
The following are bits and pieces that are worth keeping in mind so that you understand the property market in Malaysia and can get into it feeling like a pro.
What is happening in the current property market?
Lending interest rates are at an all-time low of around 3.5% and have held steady since July 2020. Prior to the pandemic, lending interest rates were as high as 5% in 2018. Historically, this is considered pretty good.
The rising cost of building materials has recorded a 20%-40% jump since October 2020. You might want to read Will Malaysia’s house price increase in 2021 amid COVID-19?
Meanwhile, EPF has recently allowed its members to apply for a withdrawal of up to EM10,000, from 1 April 2022 onwards. This was done to stimulate the country’s economy and provide support to those who have been severely affected by the pandemic.
Is there anything in Budget 2022 that helps those who would like to invest in property?
The government should be commended for what they are doing for those in the B40 group as well as first-time home buyers. However, there isn’t any allocation for those in the M40 group. Nothing in this year’s Budget incentivises or stimulates the economy for those of us looking to own more investment properties.
Here are a few key points from the Budget that prove the government succeeds in supporting certain groups of people but falls short of the expectations of the property industry key players such as CBRE, MBAM, MIEA and REHDA.
- The RPGT (Real Property Gain Tax) in the 6th year for Malaysians has been abolished so those who have held a property for over 5 years can now sell it without being taxed.
NOTE: Property sellers who have been holding onto their properties have the motivation to sell, so there might be more attractive property options in the subsale market.
- The HOC (Home Ownership Campaign) has ceased. In 2020-2021, this campaign assisted many first-time homebuyers, as they were able to enjoy significant stamp duty savings.
- RM1.5 billion worth of housing projects for the B40 group
- A guarantee of RM2 billion for Skim Jaminan Kredit Perumahan (to help with gig workers and micro-entrepreneurs, farmers and people with no fixed income).
- A special tax deduction until June 2022 for owners who rent out their property as business premises (SME and non-SME) that provides a rental reduction of at least 30%. Read more here.
- A tax deduction of up to RM300,000 until 31 December 2022, on the cost of renovation and business facilities to comply with SOP requirements. This is specifically for commercial rental properties and its focus is on making the environment safer for employees.
How to determine if you are cut out to be a landlord?
How will you know if you are ready for a child? To start your own business? To quit your current job? Some might say when the time is right… You will just know. However, in the world of property investing, there are a few tell-tale signs or skills that will determine if you’ve got what it takes.
The first thing is, are you ready for some drama in your life? Because there is no denying that property investors often deal with “unexpected events that require confrontation” and oftentimes, some legal tussles to boot. When you are maintaining a rental property you are also maintaining a tenant. This comes with the responsibility of collecting rent, ensuring bills are paid on time (to avoid utilities being cut off as most of the time, it is still under your name), tenants defaulting on the rental period and cases where an eviction is needed to reclaim your property.
The recent incident of a landlord receiving an RM695,000 electricity bill due to his tenant mining bitcoin illegally is enough to scare the faint-hearted. It is important for a property investor to be on top of his game and to have iron-like conflict resolution skills.
Aspiring landlords will need to learn to detach themselves from their rental property. We should not get emotional when it comes to the rental rate, the property selling price (when it is time to let go) or even the furnishings in the property. The property market can fluctuate significantly and getting caught up with past figures will be the downfall for many landlords.
Here’s a likely scenario: Mr Rama always rented his property for at least RM2500 per month. His tenant recently vacated and he started looking for another tenant. All enquiries came in at RM1800-RM1900 as the Covid-19 pandemic caused a market slump. Mr Rama got emotional and decided to wait until he found someone who would pay what he wanted. 6 months went by without a tenant and he had lost significantly more rather than if he had chosen what the current asking price was.
Here’s the math for the non-believers:
This point is for those people who have been labelled as “gung-ho” by their friends. Real estate is a long term investment and even if you are playing the rental game, you will want an exit plan for the future. You don’t want to be a short-sighted investor who panic sells at the first sight of an economic downturn. Moreover, people who take the time to keep themselves updated with the latest property laws are able to wait for opportunities, like waiting till the 6th year to sell a property to avoid RPGT.
The Asian Crisis of 1997…The Global Financial Crisis of 2008… The Russian Financial Crisis of 2014 …
All that risk, all out of your hands. Some people might be able to predict certain events, but for the majority, it takes them by surprise. History shows us that catastrophic scenarios are able to completely leave people stranded with their investments no matter how “safe” they may seem. That being said, there are those who find their golden opportunity. Risk will always be a factor and how you mitigate, control and prevent it is a key skill for any landlord. You might find this interesting: Is it smart to buy a house during a recession?
How much money do you need to invest in rental property?
Now, how do you determine your monthly rental rate? Speak to any industry expert and they will all say the same thing: Make sure your rental income is able to generate a positive cash flow (obtain some profits after settling all the related property costs).
How much you need to spend depends on a number of factors;
- Is the property landed or a condominium? There will be a difference in maintenance costs.
- Is the property fully furnished or a bare unit?
- Does the property primarily cater to expats or locals (expats tend to rent for the short term).
- What is the size of the property?
- Who do you want to rent to? Couples, families, bachelors, students, professionals – this would affect what type of furniture goes into the property and more!
There are many other aspects but instead of listing these out (which could take pages), here’s a simple and basic way to list out what to expect on the financial front. First, let’s assume you already have a property to rent out and if you don’t, check these out:
Next, pull out an excel sheet and start putting down some numbers!
1. You will start with preparing your rental property. This would include one-off costs such as:
- Basic furnishing for your property (typically a 2-bedroom apartment would cost about RM 20,000).
- Some repair works/touch-ups and appliance maintenance (for subsale property).
- Cleaning fees for new tenants.
- Real estate agent fees.
These are usually one-time payments for that year. This is because your tenants will have to return the property in the same condition (fair wear and tear is accepted) so you would not be expected to spend this amount again.
2. Next is the ongoing expenses. The most common items would be:
- Parcel rent/quit rent (depending on whether it’s a high-rise or landed property).
- Assessment tax.
- Management fees (for strata properties).
- The cost of having a vacant property (Varsha and Kelvin, our experts, agree that accounting for 2 months in a year is a safe bet).
Properly listing down these costs above and calculating the rental income you could receive over a period of time would ensure your survival as a landlord. Being as detailed as possible means not being caught off guard with unexpected expenses! And here’s a pro tip from our experts: It’s important to note that some of these items are tax-deductible. Remember that every little cost will add up at the end of the day. This will reduce your overall income tax and thus increase your profits.
Once you know how much your total expenditure is, you can move on to the final step of establishing your rental price. Remember, your rental property should generate enough income to cover all the above expenses.
How to conduct research before buying a home for rental investment
Location, Location, Location? Wrong!
Most people start with the same old “location, location, location” strategy, thinking that is the first and most important aspect. According to Probationary Estate Agent, Kelvin Poptani, this is often a point of frustration for many! To avoid getting stuck with one place in mind, he instead advises investors to first answer the question, “What type of property do you feel comfortable renting out?” and then choose the best location for that type of property!
Pro-tip: Investors are usually more comfortable with having their investment property close to their own neighbourhood as they are familiar with the area and surrounding amenities and facilities, thus being able to pinpoint who their target tenant is. If you’re not hiring someone to manage the property, it is obviously easier on you to manage your tenant and check in if you are nearby. On the other hand, there are some investors who prefer having their investments further away from them as this allows them to break into a different tenant market in a different place!
What do we mean by different “types” of property and market? If you use iProperty’s “Search” function, you will see the following choices for property types.
Filter through this comprehensive list based on what you’re comfortable with, what you can afford and what will, in the end, give you the best return on investment. Then find out which location has the best performing “type” of property you have chosen. This is so that you are not stuck with a property that you are not passionate about.
iProperty Transactions: Get the latest subsale property transaction data for FREE to help you make the best-informed property decisions. No sign-ups required!
Once you are satisfied with your choice of property…
It’s time to contact your friendly neighbourhood real estate agent. Building relationships with a few might work in your favour. Who knows, they might even know of a fire sale/auction for the property type of property you have your eye on. An auction occurs when a property is going for 20-30% below the market value because the seller has either defaulted on his loan or is desperate and needs to quickly offload their property. So, here’s what you need to do:
- Give them a call.
- Tell them your budget.
- Ask them to keep you in their loop.
- Prepare yourself for some viewings in the future.
If you get the opportunity to visit an investment property that is being auctioned off, make sure to take note of the following:
- How well it’s maintained.
- What the tenant mix in the area is.
- How the management team is doing (if it’s a condominium).
- How accessible the area is.
- How secure and safe the security is.
- And here’s a bonus pro tip from our experts: Have a look at the management board to see how many landlords are defaulting on their management fees! They usually put up a list.
Find out more tips here: How to buy a house from property auctions in Malaysia
How to finance the purchase of a rental property
If you’re not buying with cash, the alternative is to get a housing loan. But what if you’re not able to get a loan with an attractive margin of financing? There are a few ways to get around this, let’s dive into them:
Scenario 1: Consider a joint purchase with your spouse
Let’s say you’re earning RM 4000 a month. This means you would probably be comfortable paying a loan of RM1300. There are two reasons why this amount is chosen, the first being the Debt to Service Ratio (DSR) which is used by banks to calculate the appropriate monthly repayment you can afford. The second reason is that you never want to have a monthly loan repayment that is more than one-third of your monthly income. Kelvin, one of our experts, likes using the Law of Thirds where a third of your income goes to savings, a third to your expenses and a third to your investments.
Now, ideally, you would be renting this property and the rental income will not only cover the loan repayment, but it will also bring in a good profit each month. The reason the Law of Thirds makes sense is that, in the unfortunate (but very likely) scenario where you cannot find a tenant for an amount of time (like during the pandemic), you will then still have a sufficient amount of your own income to pay for the monthly loan payments.
So with that amount, you are likely able to afford a property worth RM300,000.
If your spouse also earns RM4000 a month, your annual household income is now RM96,000. With this, you can secure a joint home loan and afford a house in the RM700,000 range which opens up so many more options!
Scenario 2: Consolidate your loans if you’ve got more than one
You’re earning pretty well but you already have some debts under your name:
- Car loan.
- Personal loan.
- Some credit cards that are pending payment.
You want to buy a property but because you have so many different debts, it’s harder to get a loan. What you can do is opt for debt consolidation where a bank would take all your loans and turn them into one giant loan.
This helps because when you are applying for a loan your DSR is affected by all your debts. By consolidating your loans, you are able to reduce the DSR and have better chances of getting a higher loan.
There are some disadvantages such as processing fees (which can be high) and don’t forget the paperwork involved. However, it’s worth calling your bank and having a chat about it. Also, make sure to read: How to calculate Debt Service Ratio (DSR) & how does it affect my loan approval?
Other factors to consider when purchasing a rental property include the following:
How to Airbnb a rental property
Some factors worth looking into would be Airbnb and other short term stay platforms. This is something people would do if the long term rental market isn’t so strong anymore. This can be a great alternative but you will have to look into it before buying a property so that there are no complications in the future. Different properties and states have varying rules on short term rental accommodations.
In Kuala Lumpur, any landlord is able to run an Airbnb on their property. However, residential buildings are less likely to allow it due to the Joint Management Board making house rules that do not support the idea. Comments such as “landlords should not make an apartment into a hotel” are usually the reason for it. However, if your building is situated on a commercial title, then you might have more weight when it comes to making money on your property. Bear in mind, that other states have different rules. Sabah for example has placed Airbnb under the Lodging Houses By-Laws 1966. This means there are more barriers when it comes to this option.
What about home insurance?
This requires more planning as it is a huge investment in the long term. When you buy a house most banks would require you to get house insurance, in the form of MRTA or Mortgage Reducing Term Assurance. What most people don’t know here is that there are better options. Kelvin says that “MRTA is good if you don’t want to get a third party involved but it also reduces your profits at the end of the day. Since MRTA is non-refundable you have a lower ROI when you sell your property.”
What you could do instead is seek other insurance providers such as Great Eastern and Allianz. They provide a customisable plan (“build-your-own” insurance) where you can pick and choose the benefits of the plan. What you’d need to do to get started is ask for the basics needed to create an alternative to MRTA. From there, you can add or remove benefits. Some great benefits these third-party insurances offer includes insurances that can be transferred to your next property should you decide to sell it, and insurances that double as an investment that provides a cash-out after a certain amount of years.
Tips for investors looking to profit from rental property in 2022/2023
Here are some wise words from what our experts, Kelvin and Varsha have said if you’re looking to invest in the next year or so:
1. The tenancy agreement is extremely important. Ensure that the tenancy agreement outlines the responsibilities of each party. There are many cases which involve a few fused bulbs and a bidet replacement which can add up to hundreds of ringgit and if it isn’t outlined in the agreement who is responsible for these costs, disputes are sure to arise – which will affect your real estate investment.
2. Income tax. Property rental in Malaysia is subject to tax. This means you will need to have a good record of all expenses that your property incurs to reduce that tax. There is a specific list of items which are tax-deductible. Study which property you have and what tax-deductible items you can use.
3. Get a good real estate agent. An agent should not just market your property and close the deal – they also have to;
- Do the inventory check and the handover of the property.
- Repossess the property once the tenancy has expired and check the inventory again.
- Run a tenant credit check.
- Alert you when the tenancy is ending 2 months prior (so that you can discuss finding a new tenant or renewing).
In Malaysia, your relationship with your agent is continuous until the tenancy has ended. Expect this level of service or find a new agent – because good agents are out there.