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How to spot profitable rental properties How to spot profitable rental properties
Share this on WhatsAppThere is a marked difference between buying a property for your own use and buying one for investment. From the first decision to... How to spot profitable rental properties
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There is a marked difference between buying a property for your own use and buying one for investment. From the first decision to invest in real estate to actually buying your first rental property, there is a lot of work to be done.

For many first-time investors the task may initially seem daunting; owning property is a tough business and the field is peppered with land mines that can obliterate your returns. To help clear the path, here are 10 things you should consider when shopping for an income-generating property.

  1. Do your own research
    Although it is easy to leave all the leg work to real estate agents, you should really begin the search for an investment potential on your own, and determine the factors that motivate you. Having an agent could bring unnecessary pressure to buy before you find a property that suits you. The most important thing is to take an unbiased approach to all the properties and neighbourhoods within your investing range.

Your investing range will be limited by whether you intend to actively manage the property (be a landlord) or hire someone else to manage it. If you intend to actively manage, you should not get a property that’s too far away from where you live as the convenience of proximity will save you a lot of hassle and cost.

If you are going to get a management company to look after it for you, your proximity to the property will be less of an issue.

  1. The right neighbourhood matters
    The quality of the neighbourhood in which the property is located will influence both the types of tenants you attract and how often you face vacancies. For example, if you buy in a locale near a university, the chances are that your pool of potential tenants will be mainly made up of students and that you will face vacancies on a fairly regular basis (during semester breaks).
  2. Taxes and assessment
    While taxes such as real property gains tax and GST are standard across the board in Malaysia, it is important to note that quit rent and other municipal council charges vary from district to district. When investing, you must always be aware of the total cost involved so that you can accurately measure your returns.

The town’s assessment office will have all the tax information on file or you can talk to home owners within the community.

  1. Schools
    Families provide the best type of longterm tenants. Your targeted tenants may have or are planning to have children, so they will need a place near a decent school. When you have found a good
    property near a school, you will want to check the quality of the school as this can affect the value of your investment too.

Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes into play when you eventually sell it and retire someday.

Good facilities invite good long-term tenants.

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Good facilities invite good long-term tenants.

  1. Crime
    No one wants to live next to a hotspot for criminal activities. Go to the local police department or the public library for accurate crime statistics for various neighbourhoods. This is more effective than asking home owners within the area because they will be conscious of their own property values and may not be forthright about the “real” situation.

You might also want to check on the frequency of police presence in your neighbourhood.

  1. Job opportunities
    Locations with growing employment opportunities tend to attract more people – meaning more tenants. If you notice an announcement for a new major company moving to the area, you can expect workers to flock to the area. However, this may cause house prices to react (either negatively or positively) depending on the corporation moving in. The fall back point here is that if you like the new corporation in your backyard, your renters probably will too.

More employment opportunities in an area means more demand for houses.

SAN FRANCISCO - MARCH 19: A "now hiring" sign is posted on a table during the Recruit Military Career Fair March 19, 2009 at AT&T Park in San Francisco, California. Hundreds of military veterans attended the career fair that was open only to veterans. (Photo by Justin Sullivan/Getty Images)
More employment opportunities in an area means more demand for houses.

SAN FRANCISCO – MARCH 19: A “now hiring” sign is posted on a table during the Recruit Military Career Fair March 19, 2009 at AT&T Park in San Francisco, California. Hundreds of military veterans attended the career fair that was open only to veterans. (Photo by Justin Sullivan/Getty Images)

  1. Amenities
    Do a recce on the facilities and amenities available in the area, such as parks, malls, gyms, movie theatres, public transport hubs and all the other perks that attract renters.
  2. Future Development
    Most municipal planning departments will have information on the new developments poised to take shape in the vicinity. If there are many new condos, business parks or malls going up in your area, it is probably a good growth area. However, watch out for developments that could hurt the price of surrounding properties, for example industrial developments that could reduce the quality of living in the locale.

An oversupply of residential units could also negatively impact your potential rental income.

  1. Amount of Listings and Vacancies
    If there is an unusually high amount of listings for one particular area, this could either signal a seasonal cycle or a neighbourhood that has lost its lustre. Keep a sharp lookout for this red flag.
  2. Average rent
    Rent will be the bread and butter for your rental property, so you need to know what the average rent in the area is. If charging the average rent is not going to be enough to cover your loan repayment, taxes and other expenses, then you have to keep looking. Be sure to research the area well enough to gauge where the area will be headed in the next five years. If you can afford the area now, but major improvements are in store and property taxes are expected to increase, then what could be affordable now may mean bankruptcy later.
    In general, the best investment property for beginners is a residential, single-family dwelling or a condominium. Condos are low maintenance because the condo association is there to help with many of the external repairs, leaving you to worry only about the interior.

However, it must be noted that because condos are not truly independent living units, they tend to garner lower rents and appreciate more slowly than single-family homes.

Property 360 Online

Property 360 Online is a news portal focused on major issues, views and major market movements in the Malaysian real estate sector.

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