Written by: Sr. KC Law, Principal & Valuer at Action Real Estate & Valuers
Using the example from our previous post, a man had purchased a second property by refinancing his first loan. Now, he has two properties which he can rent out for cash flow gains. However, he realized that if he rented out the two properties as it is, his rental yield is still not up to his expectation of at least 5% or higher rental yield. Is there a way to increase the rental yield of his properties? Assuming that his 1st property tenant will be moving out soon, the current market rental remains unchanged and he has some excess cash in hand from his loan refinancing.
If you were in his shoes, what would you do to increase your rental yield?
There are few options an investor can do to his/her properties. He/she may choose to do nothing about it. This may be the worst choice because the property may be dirty due to ageing paintwork. By choosing this option, it may result in longer vacancy periods and worse still, it might even reduce the rental yield. The last thing any investor wants to see are numbers that don’t look good!
So don’t be overly anxious if you cannot immediately find a tenant for your vacant property, instead, you may consider doing some minor enhancements to improve the value and rental yield while looking for a new tenant. Yes, it will involve a certain amount of cost, but a proactive approach and a bit of initiative go a long way!
Here are 4 minor property improvements you may consider to significantly improve your rent rate; for properties such as flats, apartments and condominiums in the low to middle class.
1. Walls– The very least the owner can do, is to touch up the dirty walls by repainting the whole house. Besides that, you should also check to ensure that all the electrical points are working fine.
2.Toilets– The owner may consider tiling up the walls, changing damaged and rusty taps. Installing a water heater if there was none before.
3. Floor- If your apartment/condominium has a yard floor with cement render only, you may consider tiling up the floor of the yard and filling up any steps from the home area to the yard’s floor in order to have a flat ground between the yard floor and the flooring inside the condominium ; this will create a perception that the built-up area of the unit is larger than other similar units.
4. Kitchen– Replacing the zinc counter in the kitchen with a custom made concrete countertop lay with polish tiles and stainless steel sink.
You may also consider providing extra add ons such as the below:
· Curtains for all windows and sliding doors.
· Installing stainless steel clothes hanger at the balcony area.
· Providing an extra stove in the yard area for heavy cooking.
Furnishing may not always be necessary. Whether or not to furnish the property should depend on the location of your property, if your property is within the city centre or near to education institutions, then furnishing the property would be beneficial. However, it is also wise to leave furnishing the property as the last consideration so that you can tailor to the tenants’ needs/requests. Some family tenants may actually prefer to furnish their own space.
All these property improvements, as minor as they may seem, can set your property apart from the other units within the same block, which will attract more prospective tenants to your property, and more importantly, will help to increase the rental demand of your unit.
Let’s now look at the potential return on investment (ROI). For example, if the above property improvement cost you RM10k and your new tenant now pays a rental of RM300 more, compared to the previous tenant. And if your new tenant commits to staying for 3 years, you would have received a return on investment of RM10, 800. On the other hand, If this RM10k was stored in the bank as a fixed deposit, the compound interest at the end of 3 years is ONLY RM1,248.
This all sounds great. However, there is also one point of caution to note; do not over-renovate every single property you have with the intention of increasing the rental yield. It greatly depends on the type of property you have. For example, a flat will still remain a flat no matter how much money you invest to make it great. The rental value will eventually hit a ceiling. It will not fetch the rental of a condo because it is a flat.
The reason why some enhancement of rental properties is necessary is that there may be several other similar vacant units available in the market at that point in time when your unit becomes vacant. Instead of positioning your property as a me-too property in the market, you can position your property as one of the best. Not only can you get your unit rented out faster, but your unit may also be able to fetch a higher premium compared to other units.
In addition to the above, since you have tastefully done up your unit compared to the rest, you would also likely have a higher chance of getting more than 1 offer for your property. This gives you the benefit of being able to select a better tenant, perhaps one that is able to sign a longer tenancy term.
What are some other techniques you have used to successfully increase your rental yield?
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About the Author
Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyor Malaysia and Member of Malaysia Institute of Estate Agents.