5 Factors To Consider For Your Buy-to-let Property
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It is never easy to predict the direction of Malaysia’s property. However, this segment always been seen as a long-term investment. Entering the second half of the year, there is optimism from relevant parties about a recovery in the property market, but today, property speculation has slowed down tremendously.
PA International Property Consultants managing director Jerome Hong was quoted by a daily, saying: “A lot of the speculators have been removed with the various cooling measures and stringent banking requirements.
“Prior to this, developers took care of their own marketing and do not need the services of marketing agents.”
While the property market is generally slow, with many citing difficulties to access end financing and rising prices as main factors affecting demand, investors are still at large.
The difference between an investor and a speculator is, investors buy to let, while speculators buy to flip.
Speculators look solely for capital growth while investors target good rental yield and capital growth. So if you are considering investing in property or improving your returns on your existing unit, here are some factors to consider.
- CHOOSING THE RIGHT PROPERTY
Is it better to buy a landed property or a high-rise apartment? Is low-cost apartment better than high-end condominium when it comes to rental yield? What about capital gain?
It is important to note that different types of property will have different objectives. You need to ask yourself, are you looking for high rental yield or capital gain?
Rental yield per annum is the percentage return based on rental income after deducting the expenses incurred to maintain the property versus the total purchase price of the property. Capital gain, on the other hand, is the gain or loss incurred after selling the property.
A general rule of thumb is that a high-rise usually will yield better rental, while a landed property has a higher rate of capital gain.
Due to the current competition between existing units and newly completed properties, property prices of high-end condominium are expected to remain flat, therefore rental prices are also expected to adjust to the advantage of tenants.
The Edge found the highest rental yields can be found at Paramount View (7.0%) in Taman Paramount. Capital values here are depressed by its location close to LRT lines and power lines, with a low average transacted price of RM364 psf. However, the rental market here is buoyed by its proximity to an LRT station. The average unit asking monthly rental price is RM2,028 per unit or RM2.12 psf.
- DO YOUR MATH
Once you have decided the location and type of property to buy, you need to ensure the rental yield makes the investment worthwhile. For example, if you are buying a 965sq ft condominium unit in Cyberjaya, selling at RM455,000, the market rate for rental is RM1,800 for a partially furnished unit.
Some of the cost that may be incurred in a year are the maintenance fee (25 sen psf), assessment tax, quit rent and mortgage insurance. Let’s assume the cost of maintaining a unit in Cyberjaya comes to RM3,000 a year.
The net rental yield for this property is calculated as such:
Net rental yield
= ([(RM1,800 x 12) – RM3,000] ÷
RM455,000) x 100
= 4.08% per annum
However, if you have to get the property with a home loan, it is vital to include the annual interest incurred in the calculation as well. For example, you get a fixed rate loan for 35 years at 4.39% with a 90% margin of finance. Your interest for the first year is RM19,356.
Net leveraged rental yield
= (RM21,600 – RM3,000 – RM19,356)/
RM45,500 x 100
= 1.66% per annum
The above rental yield is not promising. The monthly repayment for the home loan is already RM1,910. That’s RM110 more than the rental received. Therefore, it is important to calculate the rental yield to ensure a good investment.
- MANAGE YOUR INVESTMENTS
Property investment is not something you can buy and not maintain. There is a lot of work involved, especially bearing in mind that it is a relatively illiquid investment.
If you are managing the property by yourself, you must set some time for it. From the beginning, you have to bring potential tenants to view the unit and then prepare the tenancy agreement, collect rental, pay maintenance fee and taxes as well as any repairs.
If that sounds overwhelming, get a real estate agent. However, hiring an agent may affect your rental yield.
- KNOW YOUR TARGET MARKET
Identifying the target market will help the decision-making process in terms of the type of property to get as well as location. Question: Should you target single expatriates, family, students, young professionals or corporate tenants?
If you engage a real estate agent, they can advise you on the best location to go for based on your target market and may already have a database of potential tenants.
Most first-time investors make the mistake of imagining themselves living in the invested property, instead of putting themselves in their tenant’s shoes.
If you are targeting student tenants, you should look at properties near campuses, public transportation facilities and is of a low rental. However, if you are targeting tenants with families, then you should get a bigger property with at least three bedrooms.
Malaysian families prefer unfurnished units as they have their own furniture and would like to decorate it as they please. However, expatriate families may prefer fully-furnished properties that are near international schools and shopping malls.
- TAX IMPLICATIONS
All buy-to-let property owners will be subjected to tax implications and you should fully understand them by seeking professionals. Here are some personal taxes that you need to be aware of:
Property tax
Property owners have to pay for assessment tax on residential property based on the annual rental value of the property, as assessed by the local authorities. It is generally levied at a flat rate of 6% for residential properties and payable in two instalments.
On the other hand, quit rent is also payable once a year if you own a landed property. It is charged annually at a rate of RM0.035 psf per annum.
Income tax
Rental income is taxable in Malaysia. If you find your total income for the tax year exceeds RM5,000, you may have to pay tax. However, the costs associated with the buy-to-let property, such as mortgage interest payments, property management costs and the cost of repairs can be offset against your rental income to reduce your tax payment to the minimum.
According to Public Ruling No. 4/2011, the allowable expenses for residential property investments are as follows:
Capital gains tax
It is also known as the Real Property Gains Tax (RPGT) and the capital gains tax was last increased in 2014.
If you decide to sell the property, you may be liable to pay capital gains tax on any profit you make. However, investors who are buying to let may not be affected much as they would probably hold on to the properties for a few years.
This does make property investment more illiquid than before, as it is not as easy to dispose of a property at a profit with the new ruling.
Therefore, make sure it remains as a long-term investment. Also, you need to ensure you have some savings to cope with maintenance costs.
If you choose to go for a home loan, make sure your finances will be able to cope, should the rate increase. You should also consider the budget when your property is untenanted as you still need to pay the bank.
Fret not, as with the right choice of property, in the right location, the rewards from managing a buy-to-let well can be fruitful.
