Let’s say, you are looking to buy a property for investment. Your property agent has presented two apartment units where they are of the same block, size, and floor number in a development. Their details are as follows:
It is a 750 sq. ft. bare unit which is being marketed for RM 300,000. Its previous tenant who vacated the unit three weeks ago had rented it bare for RM 1,000 a month.
It is a near identical unit with Property A where its seller had converted his unit into a full-fledged hostel unit which is operated by a licensed property manager for a fixed fee amounting to 20% of rental collection a month. Over the past 12 months, the gross rent collected for Property B is RM 1,700 a month. Presently, Property B is being marketed for RM 360,000.
Which of the two units would you prefer to invest?
Here, I’ll list down 5 major factors which may help you to consider between the two units:
1. Who are Your Tenants?
In a way, the value of a property is dependent on how much rent its owner may collect from his tenant. Hence, before investing, it is best to determine who will be the prospective tenants in your property and what key factors could be most influential to a decision to occupy your unit over neighbouring units. In general, different types of tenants would value things differently. For instance,
2. Do You Need to Refurbish the Unit?
As I write, it is becoming a norm for a unit to be, at least, semi-furnished before it is being marketed to potential tenants. It is about securing better tenants at a better rate faster than neighbouring units.
Thus, if you opt for Property A, believing that you can rent it bare to a tenant at RM 1,000 a month, you could face the possibility of failing to secure a tenant or tenants for your property, especially if the tenants have options to rent either a partially or a fully-furnished unit closeby at competitive rates.
If that is the case, you may consider renovating your unit as a Plan B in order to enhance your chances of securing a prospective tenant especially if you aim for tenants who are either students or working professionals who would like a unit that is of ‘move-in condition’.
That leads us to Point #3.
3. What is the Estimated Cost for Renovating a Property?
Once again, it depends greatly on who your intended tenants are. For instance, if you are aiming for student dollars, it could be cheaper as you can do without interior design. But, if you are aiming for expatriates, the price could be at a lot higher due to the need for interior design to make your unit more appealing.
But, with that being said, if you aim for students, you may choose to convert an under-utilised space (usually the living room) into 1 additional bedroom, where you may rent it out for additional income. This would cost you a little more as it involves partitioning an extra room with one additional air-conditioner, bed and wardrobe… etc. But, it may turn out to be a good investment if you can bring in higher rental income from it.
Here, for our discussion’s sake, let’s generalise the renovation cost at about RM 30,000 (RM 40 psf) without room partitioning and 37,500 (RM 50 psf) for room partitioning. (Remember: the unit is 750 sq. ft.)
4. Do I Need to Hire Property Manager?
Nope. It is not necessary if you rent your property unit as a whole.
However, if you opt to rent your property unit on a per room basis, I personally would reckon you to engage the services of a licensed property manager. It is a lot more time and cost efficient. Yes, sure enough, you might save a few ringgit by collecting rent, do the cleaning and minor repairs yourself, but for your time and energy spent on doing these tasks, what could you be doing to enrich your life?
Would you be able to spend that time to improve your business profits? Or, can the same amount of time be spent on improving other areas of life? This would include health, family, church, relationships, and a very important ‘me-time’. As such, it depends on whether or not, saving a couple of bucks is worth it to you.
Once again, for discussion’s sake, let’s assume the fee to engage the services of a licensed property manager amounts to 20% of your gross rental income.
5. Putting it Together: A Consideration of Capital and Rental Yield
As such, let’s work on several options:
Option 1: Property A: Rent it Bare.
This is a straightforward case of buying the property at RM 300,000 to secure a tenant who is willing to rent it bare at RM 1,000 a month.
Option 2: Property A: Rent the Whole Unit Fully-Furnished
This involves buying the property at RM 300,000, spending some RM 30,000 in renovation costs, and to secure a tenant who is willing to rent it for RM 1,200 a month.
Option 3: Property A: Rent the Unit on a per Room Basis.
This involves buying the property at RM 300,000, spending some RM 37,500 in renovation costs, and to find tenants who collectively rent it for RM 1,700 on a per month basis (matches the rental rate for Property B). You engage a licensed property manager who charges 20% of the gross rental proceeds.
Option 4: Property B: Buy and Carry On with the Hostel Operation.
You purchase the property at RM 360,000 and continue on with the operations, where it generates RM 1,700 in monthly rent. Likewise, you agreed to pay a fee of 20% of the gross rental proceeds to your licensed property manager.
Therefore, the ballpark figures for all 4 options are worked out as follows:
From the table above, I found:
1. The best is Option 3 where you buy Property A and convert it into a unit that is suitable for room rental operations for it generates the highest yield amongst the 4 options. But, it is also the most capital intensive for it requires you to fork out a larger amount of capital (RM 79,500).
2. However, Option 3 carries numerous risks of uncertainties. They may include uncertainties in the speed of securing tenants in your property and the fees chargeable by your licensed property manager.
3. As such, Option 4 can be considered. The amount of initial capital required is much lower and its yield is comparable to Option 3. In this case, Property B can be considered as a suitable investment despite it being marketed at RM 60,000 higher than Property A.
In short, the above is an illustration on what you may need to consider before a decision can be made between Property A and B. The above calculation omits a possibility to do ‘mark-up loan’ to fund both the purchase and renovation costs of Property A and to access their impact in terms of RPGT, should you intend to dispose of them in a future date.
Of course, I acknowledge that there are more to be considered before making a wise decision between the two. So, if you have anything constructive to share, I would like to invite you to post them before this article.
Thanks in advance!