Q: “What’s my take for properties that fetch negative cash flow? For eg, an apartment with a monthly installment of RM 2500 but a monthly rental of RM 1800.”
As the current price of property continue to remain high in Klang Valley, most of the investors are complaining that it’s almost impossible to find positive cash flow properties.
INTENTION OF BUYING THE PROPERTY
When you place the booking for the property, was it for own stay or investment? The most common answer I get would be both, where some may consider renting it out for a few years before moving in. This indirectly created a blind spot of reality where the buyer will be driven with emotion driven elements instead of checking the surrounding rental rates.
The most obvious cashflow positive projects in the market today are either:
- Luxury products targeting expats or Airbnb purposes around the city centre area with extreme convenience, or
- Middle-to-low cost apartments but I strongly don’t encourage this *be a responsible capitalist
- Student focused areas where a 3-bedroom apartment will be dissected into 5-7 rooms *or pigeon-holes to be listed out to students individually
- Desperate owners wanting to let go their property urgently below the market value
- Auction properties where properties are sold 25%-30% below the market price
Hence, these cashflow positive properties are most often not appealing for buyers who wants to use the property for own stay purpose. As a result, many amateur home purchasers will never experience positive cashflow.
SUB-SALE OR NEW PROPERTY
In the tough property market currently, developers are doing their very best to spice up deals to attract purchasers. Besides zero down payment, free legal and stamping fees, free kitchen cabinet, lucky draw with phones or cars as their grand price… All these sweeteners will be absorbed into the selling price, in other words paid by the purchasers. Just that purchasers will not feel it as the cost is spread over 30 years of monthly installments.
Therefore, the rental return for new property cannot never match the monthly installment because most of the prices of new properties are inflated *usually 20%-25% above the market price.
Also, there has been many investors fell prey to their greed and got several properties with handsome cashbacks. They are given 20%-30% cash back for every property and instantly they are millionaire in cash term when their loans are approved. The upfront cash are supposed to be used to pay the difference between the rental and monthly installment. Unfortunately, most of these purchasers failed to have discipline for the money and they spent it before the unit is ready.
There’s also a higher possibility of scoring a cashflow positive property via the sub-sale market as purchasers get to gauge the rental rates prior to buying, just that there’ll be a capital of 18%-20% required.
SOLUTION TO FIX THE CASHFLOW
- Outlook matters
Improving the condition of the property from bare unit to semi furnished, or to fully furnished. It ranges from a fresh coat of paint or basic lightings to doing a makeover where your unit will be transformed into a designer unit. The idea to look have that impressive first look of the property when tenants search online to their first visit.
You can either engage an interior designer, contractor or you can DIY based on the budget you have. If budget is a concern, a trick is to leverage on the zero interest installment services that online shopping platforms provide. But the areas of the unit to focus will be too much to write about here.
However, this is highly dependent on the location where the tenant profiles are different. There’s no point investing another RM50k where the surrounding tenants are mainly middle-class income earners. So do clarify who are the target audience, aka tenants for your particular property.
- Converting your unit into an Airbnb/short term stay property
Again, this approach only makes sense if your unit is close to LRT/MRT station within the city or it’s located in a local tourism hotspot. But this is highly dependent on the Management Committee of the building, whether do they allow operations of Airbnb. Many buildings of the luxury segment in KL have shut down operation for short terms stays due to security reasons.
- Subletting the rooms in your unit
This means you let out room by room individually. Although there will be more party for you to liaise with, but this usually generates higher return for the property. “Masterbedroom for RM 800” sounds more affordable than “RM 2500-unit for rent”
- Partition the unit to have more rooms
This approach is rather common for areas with tenant profiles comprising students and the lower income individuals where they calculate based on number of beds.
This is only applicable for properties with a higher market value. For refinancing, usually the bank will only allow 70%-80% of the market value. For eg: If the property was bought 10 years back at RM 500,000 and the current market value is RM 600,000. The bank can loan you 70% of the value, which is RM540,000. Instead of thinking about value, do consider the tenure which means to refinance the remaining loan amount, in this case would be RM 420,000 back to 35 years instead of the remaining 20 years *provided you’re young enough.
For new property usually this approach won’t be sensible to take as the valuation may be lower than the SPA price most of the time.
Finding a property that has positive cashflow before buying would be a better investment strategy compared to increasing the property rental just to match the monthly installment. This is when having capital, which allows you to consider investing in sub-sale properties becomes such a wise strategy in this current market. Cash allows you to have certainty=)