How I increased my Rental Income by 14% in 2 weeks.

Rental Income Update

With the lackluster dividend income last month, the real juicy part of April 2016 is in my rental income.

I managed to increase one of my unit’s monthly rental income to RM800 (previously RM700 per month). An additional RM100 translates to a hefty 14% increase the unit’s passive income. I stand to earn an additional RM1,200 per annum thanks to a few changes I made to the property and also a few well placed and not to mention FREE ads.

Rental Income Property A - New Look
New Look

How I did it

First things first, the aforementioned property is Property A in my Real Estate Portfolio. It all started when I was notified by my lawyer and close friend that Property A’s tenancy will be approaching its one year deadline soon. I as the owner had the option to increase the rental for another year’s renewal. I happily surveyed online property sites and noticed that rental rates are going for RM750 semi furnished for similar properties around the neighbourhood. A perfect opportunity for me to increase my rental income, or so I thought.

I proceeded to contact the tenant and told him I’d like to revise and increase the rent to RM750, thinking it was no big deal. He called me back a day later saying he and his mated are opting to vacate the unit. He will be leaving on the 18th and will be forfeiting the rental he had already paid for April. We are on good terms and he had no issues handing over the keys to me earlier, I was of course devastated and sad to see such a good paymaster go.

In hindsight, this was actually a blessing in disguise as I had the right idea when I decided to further furnish my unit. I decided I could ask for RM800 a month in rent if I could advertise the unit as fully furnished (other fully furnished units were going for RM850). I already had the living room and bedroom covered. As luck would have it, I was able to furnish the unit with second-hand refrigerator and air conditioner. Both cost me nothing as the fridge was from my aunt and the air conditioner from my parents’ house. I re-labelled the unit for rent as fully furnished and the calls and texts came pouring in. I advertised on various sites but found that I got the most responses from Mudah.my.

Rental Income Property A - Refrigerator
Relatively new Refrigerator
Rental Income Property A - Dining Table and Chairs
I even have a dining table and chairs

I at first was worried that I wouldn’t be able to rent out the unit by April and considered using the services of some real estate agents. However, after a few unsuccessful viewings and upon learning that they’d take a month of my rent from me, I instead chose to just spend some of my time showing the unit to potential tenants on my own instead. I had to tag along every time a potential client is brought by an agent anyway. I’ve estimated that I spent no more than 20 mins per visit (I live nearby) and I’ve done almost 10 visits before the right tenant came along. All in all, that’s 200 minutes spent to get and additional RM100 a month in passive income. Not too bad in my books.

A further side notes on my experiences with some unscrupulous real estate agents, once you post your own ad on sites soliciting for tenants, you will inadvertently receive multiple calls and texts from agents wanting to assist you with ‘ready tenants’. They will then ask for photos of the unit from you and then guess what they do? They re-post your unit on the sites. Some of them even had the audacity to re-post my ad with a lower rental -RM750 for example. The only recourse I saw for such actions was an angrily drafted email to their respective agencies. You have no idea how mad I was when I saw their ads. Lesson learnt, never send photos of your unit to real estate agents, if you have to, make sure they don’t repost on sites you are already advertising on.

As for the tenancy agreement, I got my solicitor to draft a simple and standard one with a clause for a 10% increment in rental every year at my discretion. It was free of charge as she has been my attorney for many years and you won’t believe the legal fees she has earned from me through out the years. The market rate for a standard tenancy agreement should be around RM100 – 200.

Conclusion

So, as a conclusion:

  1. Survey the market for up to date rental rates;
  2. Source for free furniture and appliances from family members, if unsuccessful, look for second hand deals;
  3. If you have time, conduct viewings yourself, post your ads online and be careful of agents; and
  4. Establish and maintain a good relationship with your tenants.

I can’t stress point number 4 enough. Treat your tenants right, even the ones that are leaving.  You never know, they might refer future quality tenants to you. Although maintaining a positive relationship with a tenant is crucial, I am always strict on rental payments and it is something I emphasize both verbally and in writing.

My Real Estate Portfolio

Real Estate I Currently Own

It is not in my nature to write about things I do not own or understand. Unlike most ‘experts’ out there who preach and sell products that they themselves would not invest in. So, full disclosure here, apart from my investments in the stock market, my humble real estate portfolio consists of 2 low-cost rental apartment units in Kuala Lumpur.

A brief summary on my properties:

  • I’ve managed to secure stand-up tenants;
  • Both properties are financed by banks; and
  • Both properties are held under a Sdn Bhd I own.

Property A:

Real Estate - Property A

  • RM224 a month positive cash flow translating to an ROI of 17.74% p.a. (I’ve factored in the relevant maintenance costs etc);
  • Appreciated roughly RM25K in value as at March 2016;
  • I bought Property A through an auction about a year and a half ago, I managed to gain access to the property and rented it out for almost a year before I started paying my loan (will have a separate article on how I did it soon);
  • Currently tenanted at RM700 per month.

Property B:

Real Estate - Property B

  • RM183 a month positive cash flow translating to an ROI of 8.08% p.a. (I’ve factored in the relevant maintenance costs etc);
  • Appreciated roughly RM20K in value as at March 2016;
  • I bought Property B through as a subsale unit;
  • Currently tenanted at RM750 per month.

So, why real estate? I was hesitant to invest in real estate because I knew it would take up a lot of my time and effort to maintain a rental property. What made me take the plunge was the leverage I was able to get from banks to invest in real estate. Essentially, I only needed to put up 10% of my own money for the property and the bank would fork out the remaining 90%. This would have been impossible for stocks, even margin accounts don’t give you that much leverage for your money.

I decided from the start that the properties I own will have to be close to where I live to facilitate monthly inspections and the likes. I also made sure that I would be able to get a surplus income after deducting all related expenses. Which is why I ended up with low cost apartments because only those made financial sense to me.

1. Cash flow, cash flow, cash flow!

Cash flow is the extra profit left over after all of the expenses have been paid on a property. Using my properties as an example, my rental properties produced RM1,450 in income and my estimated expenses came to RM1,050, this would leave me with a positive cash flow of RM400 per month.

Now, I know a lot of you are saying, “Four hundred dollars is not going to make me a millionaire.”

Probably not. But remember, we are just talking about one of my asset classes.

Additionally, that RM300 might be from just one property. If I owned ten similar units with the same cash flow, that’s RM3,000 per month. If I owned 100 units, that’s RM30,000 per month. This cash flow can go a long way toward helping you quit your job — or helping you save for a future big purchase, or retire wealthier.

2. Appreciation

When I talk about appreciation, I am not referring to how much I like you (though I do appreciate you!). I’m in fact referring to the rise in value that real estate experiences. For example, if you purchased a property for RM200,000 ten years ago, and today that property is worth RM300,000, the appreciation made you RM100,000 richer!

Of course, appreciation doesn’t cause values to increase every year (consider the U.S.’ housing market in 2007!). However, historically, real estate prices have appreciated over the long term. So, again, appreciation alone is not likely going to make you a millionaire, which is why I don’t recommend that people purchase bad deals hoping that appreciation bails of them out.

It has never made sense to me when people purchase properties in the hopes of the making capital gains on it while servicing their mortgages every single month. Just like how I am acquiring shares with awesome dividends, I buy my properties that provide me with essentially the same thing – postitive cash flow. That way, my tenants will help me service my mortgage and I receive the remaining dollars.

3. Tax deductions

Finally, one of the more overlooked parts of real estate investment.

Back in 2014 I incorporated a Sdn Bhd for as a holding company for my investments and decided that the way forward for my real estate portfolio was to park them all under the company.

Although I had initially planned to only park my commercial properties under a Sdn Bhd, I realised that the low cost apartments will always be investment properties for me. (A side note: please do consult your solicitors or counsels on the pros and cons of placing your real estate under a Sdn Bhd before you attempt it.) I will have a comprehensive article on why I chose to have my properties all registered under my company in the future.

Putting it all together

So far, my main source of passive income comes from my Freedom Fund‘s dividends, earning me a total of RM7,544.14 last year. My real estate portfolio should earn my about RM4.9K per annum this year. I hope to snap up a medium cost apartment or a commercial property in the future and bring my annual real estate income up to RM10K p.a. in the foreseeable future.

Instead of a physical property, some of you may be interested in investing in Real Estate Investment Trusts (REITs) in the stock market. You are able to get access to large real estate including shopping malls, office towers as well as hotel chains through REITs. Learn more about them here in my Complete Guide to REITs in Malaysia.