You bought a 3-room condominium unit for RM 500,000, where you paid a 10% down payment and financed the remaining 90% with a 35-year mortgage which is worth RM 450,000 at 3.5% per year. Hence, the mortgage payment works out to be RM 1,860 a month. Inclusive of its service fees, sinking funds and all other related expenses, your cash outflow is RM 2,300 a month.
Over here, you have three choices on how you can earn rental income from this property. They are:
1. Rent it out as a whole unit for RM 1,500 a month.
2. Rent out each of the 3 bedrooms separately to 3 different tenants. Here, let’s say, your unit has 1 master bedroom and 2 smaller rooms. You could charge RM 900 for the master bedroom and RM 600 each for the two smaller rooms. Thus, if the 3 rooms are fully occupied, you would earn RM 2,100 per month in rental income from this condominium unit.
3. Rent the whole unit out on a daily basis via AirBnB, Agoda, and Booking.com. You could charge RM 180 a day for your occupants. Assuming that you can have 20 occupied days for your condominium unit, you could stand to earn RM 3,600 in rental income on a monthly basis.
So, which of the three choices of rental strategies do you prefer?
Obviously, based on monetary gains alone, you may prefer the third option as it generates the highest yield and positive cash flows from your property. But, the question is, ‘Is it worth it to you?’. This is because, although daily property rents may enhance your property returns, the approach to managing your property is very different. Here, let’s examine:
Option 1: Rent Out the Whole Unit
In this case, you deal with one tenant at one time. If your relationship with your tenant is steady, you could receive your rental income on-time for a long period of time, which can be either for a year, two years, and much longer. This means, you could be almost hands-off in managing your tenant, particularly if he or she is a sensible person. So in other words, Option 1 yields the lowest but it doesn’t require much active or physical labor to manage your condominium unit.
Option 2: Room Rentals
Unlike Option 1, you will deal with multiple tenants if you choose Option 2. This option is common among investors who want to boost their rental income from their properties. However, there are several major factors to be considered first before embarking on this rental strategy:
1. Tenant Mix
Will your unit be an all-dude, all-girls, or a mixture of male and female tenants? As smart landlords, you have to consider this and minimize such frictions. If you could do so, you would create a harmonious living condition for your tenants of the condominium unit. However, a failure to address conflicts could risk turning your condominium unit into a warzone.
2. House Rules
This is related to your tenant’s use of the common areas in your property. Here, they include the living room, bathroom, dining area, kitchen, corridor, and even the storeroom of your condominium unit. You cannot expect all of your tenants to be clean and tidy, sensible and respectful to one another. Thus, as a landlord, you have to state your house rules and be firm to execute them.
3. Utility Bills
How would you split the utility bills among your tenants? One tenant may use a lot more electricity than another. In this instance, you might consider setting up meter readings for each room in the condominium unit. This could allow you to allocate utility bills more accurately based on individual energy consumption.
By now, you could think to yourself, ‘Is it worth it to go through all these hassles to earn potentially another RM 600 per month in rental income?’. Yes, the word here is ‘potential’ as it is possible for you to have one or two rooms unoccupied based on this type of rental strategy.
Option 3: AirBnb, Agoda, and Booking.com
First, this option is available only if the management corporation (MC) allows it. So, let’s say you have ‘thumbs up’ from the MC to run your homestay operation with your condominium unit. Your tenants could choose to occupy your unit for a day, two days, a week, and so on and so forth. Now, assuming that you landed yourself 20 occupied days from eight different tenants, you need to ensure that your unit is clean and inhabitable every time a tenant vacates. So, would you be the one cleaning your property unit? How much does it cost to replace items in your unit if one of the tenants took them away? How much does it cost for your unit to be well-advertised in order to secure occupants consistently?
As you can see, this is a form of side hustle as it demands more time to manage your property unit. It requires you to standby and be close to your unit because you could be required to address your tenants’ immediate needs.
Which of the three strategies should you choose?
Well, I can’t answer that for you. But as for myself, I would opt for Option 1 as it is less demanding in terms of my time and effort in managing the property. Yes, this option yields the least for my property. However, I believe that my time can be more productive, if I spend it on building my business or career as compared to managing the condominium unit. So, I still find Option 1 to be most suitable.
But, if you have the manpower, time, energy and interest, you could choose the other two options as they can offer much better yield as compared to Option 1.
So, all in all, property investment is not always about the returns. Rather, I think it makes more sense to strike a balance between returns, time, and effort spent on managing the property.