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Jan 12
2010
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Price and LeveragePosted by Samer Helmy in Tips, Rent, Property Investment, Price, Leverage |
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Many investors are not exactly aware of the fact that there is a ballistic trajectory to the potential return of property in relation to its price.
Rental return in general tends to improve in the beginning phases as the really cheap ones either have no facilities or comfort and mostly fetch peanuts for rent, or old and tired and cost a lot in service charges and maintenance in relation to its rent to produce a healthy final rental yield (this is a really rough curve, so don't think the angle represents a relative portion of the property market).
Now afterwards, the plateau is basically the "sweet spot" where rental yield to property price is maximized, in KL we're talking above 6%. This represents your medium to premium condominium apartments and homes.
The sinking portion of the curve is when you get to high value properties, such as major KLCC condominiums and bungalows. The rental yield in relation to price falls as that number grows, because simply the reasonable rent to charge on such high end properties is not high enough to keep such a percentage. For example, think about a RM700K 3 bedroom condo in Mont Kiara, and a RM 4 million 5 bedroom condominium in KLCC. The first is easy to rent for 4,000 per month, 48,000 annual rental, or more than 6% yield after service charges. But for the second to net 6%, it needs to rent at more than 20,000 per month, 250,000 annual rental or more. Do you believe it's possible in today's market? I didn't think so either. Now think how much rent you need to collect on a RM 10 million Damansara Heights bungalow to get to 6%? You're right, more than 50,000 per month, which is practically impossible unless it's a palace that would cost twice as much in the first place and furnished for at least another small fortune.
So do your homework to learn what is popular, in demand and gives you the biggest bang for your buck, before plunging and buying a property unit that might rent hard and still underdeliver.
Rental return in general tends to improve in the beginning phases as the really cheap ones either have no facilities or comfort and mostly fetch peanuts for rent, or old and tired and cost a lot in service charges and maintenance in relation to its rent to produce a healthy final rental yield (this is a really rough curve, so don't think the angle represents a relative portion of the property market).
Now afterwards, the plateau is basically the "sweet spot" where rental yield to property price is maximized, in KL we're talking above 6%. This represents your medium to premium condominium apartments and homes.
The sinking portion of the curve is when you get to high value properties, such as major KLCC condominiums and bungalows. The rental yield in relation to price falls as that number grows, because simply the reasonable rent to charge on such high end properties is not high enough to keep such a percentage. For example, think about a RM700K 3 bedroom condo in Mont Kiara, and a RM 4 million 5 bedroom condominium in KLCC. The first is easy to rent for 4,000 per month, 48,000 annual rental, or more than 6% yield after service charges. But for the second to net 6%, it needs to rent at more than 20,000 per month, 250,000 annual rental or more. Do you believe it's possible in today's market? I didn't think so either. Now think how much rent you need to collect on a RM 10 million Damansara Heights bungalow to get to 6%? You're right, more than 50,000 per month, which is practically impossible unless it's a palace that would cost twice as much in the first place and furnished for at least another small fortune.
So do your homework to learn what is popular, in demand and gives you the biggest bang for your buck, before plunging and buying a property unit that might rent hard and still underdeliver.
