Rental Return as a Bait?

Q.
Can you rely on the Return of Rental Income to purchase your property?

A.
Recently in SHEDA Property Expo - 25 - 28 Sep, 2015, Kuching, I came to notice that most property sellers from KL are making Return of Rental Income as a selling point for their products.

One project in the Greater KL area even forecast the return of rental based on the hostel charges by a nearby university to come out with an astonishing figure of RM6,000 per month! This is compared to the selling price of RM1mio, a whopping 7.2% yearly rental income return!

6,000 x 12/1,000,000 x 100% = 72k/1,000k x 100% = 7.2%.

Yes, you might get such return if your property was bought say >10 years ago! An example is my Pandan Indah Condo - RM1,400 rental monthly, purchase price was RM180k.

1,400 x 12 / 180,000 x 100% = 9.3%!

Hold your horses! If you are looking for a return of rental at >6% (Amanah Saham Malaysia or KWSP), then a property costing RM400k should be rented at RM400k x 6% / 12 = RM2,000!

RM800k property would require a rental of RM4,000! And, RM1.2mio at RM6,000!

So, this unit of apartment next to a Uni is asking for at least RM5,000 rental to achieve a 6% return. Let's look at the specifics.

A little over a thousand square feet, the unit has 3 rooms. And, if each room is rented at RM1,000, it is impossible to come out with RM6,000 monthly rental collection! So, I was pondering over how they came out with such figures!

According to the negotiator, the rental per month per head for the hostel in this university is RM900-1,000 per person! So, let say we put 2 persons sharing a room, that is RM6,000!

OIC!

This is how they came out with the figure! So, I did not want to ask further but threw him a question:

If I were to use the RM1mio to buy a few units of lower price property, would I get a better outcome?

He asked his boss to answer me.

The boss initially thought that I was saying buying a few units of RM1mio as an investment! Wow, is that how easy to sell property in KL?

After having clarified, he asked me back - "where got can buy a few units with RM1mio?"

In fact, that is very true in KL - no such cheap thing anymore in KL.

However, I just wanted to get a balance opinion about the strategy of spreading the risks!

Of course, he knew I was not keen to buy, hence said that there is no rental value in Kuching. It is better in KL - which is much ready for investors who are looking for rental return.

An honest truth, I agreed. However, speculating on an expensive property in Greater KL hoping for rental return is very risky I said. For, you might never know that the Uni may just stop operating in few years time, or they increase their hostel capacity in view of the good rental value! And, everyone buying into the project is waiting for rental, the rental value will crash!

The gentleman rebattled that most Uni are not likely to get involved in the construction business, as they only concentrate in their core competency of bringing education to the public. And, looking at the land cost at the area, the likelihood of competing units would be minimum.

You see, the argument is so convincing! The promises are in the future! Everything we read here is all about the future! It is clever, you have no way to prove it wrong!

In the future, this will be so in demand! In future, you will make this money! In future, this and that!

Do we have any concrete figure to rely on?

That brings me to the issue of Comparative Index.

How nice if we have a system of comparative indices on the return of rental income in such area? This is what I previously wrote IPI - Inter-Property Index. On another index called TRIPI - Transfer Return IPI, I wrote about modification on the IPI to reflect on Property Appreciation Value.

These figures will be current and shared among the real estate people to offer a reference point for investors. Of course, this index is costly to obtain. Most agency firms would not disclose the figures due to certain trade secret and self interest.

Nevertheless, I personally hope that with more agents working together as a team like what I am here doing - with the LPPEH examination and setting up of an associates of agents - these indices will be shared among all agencies in the network. I welcome everyone to work together to establish this index!

Of course, the users are also the contributors. Thus, this system will hopefully sustain over time.

Thank you for reading.