Investment Property

How to manage an investment property?

Seasoned property investors would know that many self-help books teach readers how to acquire wealth through good income – yielding property. They offer techniques on buying good investment properties and look at the issues one should consider before signing on the dotted line.

However, many of those books do not discuss how you can successfully and effectively manage an investment property.

Owning an investment property itself is like a dream come true for many but it is only half the battle. If you want an investment property to earn good returns over the years, you must focus on managing it effectively from all aspects, such as caring for its physical condition and ensuring that it is in the hands of good tenants.

Most people invest in property to enjoy capital appreciation and rental income. But Malaysian tends to look for regular income from the latter. So, it is important for these landlords to know the basics of managing their real estate investment so that it is attractive to potential tenants.

Informed landlords

Unlike in developed nations such as the US and Australia, local property investors rarely engage professional estate agents to manage their investment properties. Malaysians generally prefer to manage their own investment properties, especially residential ones, and only turn to established estate agents or consultants if the property is a high-end development.

Or they engage professional help only after they have tried but failed to secure a tenant for their property. With most investors preferring to take care of their own units, they need to be informed landlords. They must be able to deal with rental and tenant-related issues.

This is important because renting one’s property to total strangers in exchange for a fixed rental sum is not a small matter, and it comes wit risks.

If, from the start, the landlord gets the basics right, such as finding a good tenant, signing a fair tenancy agreement and setting a reasonable rental rate, problem can be minimized.

It is common to hear tenants relating horror stories about landlords but the truth is, they are as many horror stories about tenants as well.

We are not talking about tenants being bad paymasters but also being responsible. They damage properties and make unreasonable demands as excuses for not paying rent. The only way to avoid or minimize these issues is to be a landlord who is strict in terms of setting the overall ground rules.

Rental & monetary issues

Rental is one of the most important aspects of managing an investment property because it determines the rate of returns earned. Normally, investors set the rental rate based on the prevailing market rate; they take into account the existing rental of similar properties in the same locality.

However, investors also need to take into account other issues before setting a rental rate for their property. Don’t forget to take into account the extra features and expanses associated with your own property. For instance, your unit could be bigger, and such units usually demand higher rental if they are in good locations.

Also, do factor in the costs your incur in terms of maintenance, service charges and sinking fund payments (for strata and gated community) as well as assessment, quit rent and fire insurance premiums (for landed, strata and gated community projects).

Many landlords tent to focus only on ensuring that the rental obtained is sufficient to cover their monthly housing loan installments. If the rental from your investment property is higher than your monthly installment, that’s good for a start but that is not all…the rental must be sufficient to cover all other costs incurred such as maintenance, service charge and quit rent.

Comparing the rental rate of similar properties in the same locality is good but that will not automatically determine the rental for your property as you may not be paying the same service charge and maintenance fee as other landlords.

If you own a high-rise condominium or apartment, note that rental for units on lower floors can be slightly higher. The same principle also applies in terms of capital value.

In addition, if your property is a corner unit with additional built-up space or has a balcony with swimming pool or garden view, the rental could also be a little higher.

Thinking about letting out furnished units for higher rental? You must secure a good tenant before furnishing the unit, as you won’t know what the tenant’s requirements are. Tenants can be unpredictable. Some locals would mind moving into a fully furnished unit while others want to bring their own furniture.

Usually, expatriates staying here for a year or two prefer furnished units because it will be a waste for them to buy their own furniture.

So, they key is to first secure a good tenant, then find out his requirements and decide whether or not to furnish your property.

If you are letting out a fully or partially furnished unit, be sure to also factor in this cost in the rental. Ideally, you must be able to recover the furnishing cost within three or four years.

The wear and tear of furniture is quite high, especially if a property is let out to a family with young children. However well the fittings are looked after, landlords have to replace the furniture every five years to ensure that the property remains attractive to tenants.

Finding a tenant

There are two common ways to find a tenant – you can place advertisements in local newspapers and on community information boards or hires a real estate agent to do the job.

If you choose the classifieds, you incur the cost of placing the advertisement. And the process may take longer because you will have to handle all inquiries that come in. if you are looking for tenants on your own; time is an issue because you need to accompany potential tenants to view the unit at their convenience. Tenants usually want to view properties after office hours or during lunch, or on weekends and public holidays.

If you hire a professional, the main issue is the fee payable [which is usually one month's rental]. But, in return, the estate agent will take care of everything. You will have little worry about if you hire an experienced and reliable agent.

Whichever way you go about finding a tenant, note that the location of the property itself will attract certain types of potential tenants. For instance, if your property is close to colleges and public universities, rental demand will mainly come from students. If you do not want to rent the property to students, you may risk leaving the unit unoccupied until some family or working adult decides to rent it.

Likewise, if you have invested in a low-cost residential unit, you can’t expect to have an expatriate or diplomat as a tenant.

You must also conduct your own due diligence when it comes to evaluating potential tenants. Never settle for the tenant who is willing to pay the highest rent. He may not be a good, long-term tenant as he could be demanding in other areas.

Always check the background of the potential tenants, verify their employment status and details, find out why they vacated their previous place and be firm when it comes to timely rental payments.

Tenancy agreements

The tenancy agreement legally binds you and your tenant and, as such, it is very important to ensure that all the terms and conditions stated are agreeable and clear to both parties.

Important clauses in the agreement are the ones that touch on rental and other monetary issues. Basically, a good tenancy agreement will spell out the monthly rental payable by the tenant and all other monetary obligations for which he bears responsibility.

In most instances, a tenant pays the monthly rental plus utility charges incurred when occupying the property while the landlord is responsible for all other charges like service and maintenance fees.

However, the arrangement could be different in some cases. Some owners may be willing to let out their properties for a lower rental return provided the tenant assumes responsibility for the service and maintenance charges.

A standard tenancy agreement will also state the amount of deposit, advance payment and utility security charges that needs to be paid before a unit can be occupied.

Another important aspect is the tenancy period. As far as possible, avoid signing tenancy agreements for one year as it is too short a period. Secure a tenant for two or three years and then review the tenancy after that period. A good tenancy agreement should also state how much notice a tenant ought to give his landlord in the event he decides to terminate or not renew the contract.

If you are renting out a fully or partially furnished unit, remember to list all the fittings and fixtures in the property and clearly state in the agreement that the tenant should exercise reasonable care in using the facilities provided.

You can also state in the agreement that your permission is required if your tenant want to carry out any renovation or drill on the wall. All these clauses will help minimise future disputes.

Be a successful investor

Those who want to successfully manage individual investment properties must exercise openness. Under more circumstances, the relationship between a landlord and tenant turns sour when both parties fail to establish a professional relationship that is based on mutual trust and openness.

Dealing with tenants is very much like doing business and in this instance; both parties must understand each other’s requirement and be able to give and take.

Ultimately, a landlord’s objective is to enjoy timely rental income but at the same time, he should also provide value-added services to the tenant when the need arises. Attend to repairs quickly, for instance. Likewise, apart from paying the rent on time, the tenant should also take reasonable care of the property and adhere to set house rules. Most importantly, both parties should be open about their requirements and strive to keep each other happy.

Another salient point is to never depend on verbal agreement. Both parties should always agree on terms and conditions set out in writing before signing on the dotted line.