I have always been passionate about real estate investing and the possibility of generating passive income and building wealth through the accumulation of Real Estate over time. However, in my study of millionaire property investors, I realized that merely owning property does not give you passive income.
Instead, turning the home into a rental property that is ready for tenants has helped many millionaire property investors generate passive income. However, the role of being a landlord comes with responsibilities and risks.
For example, as a landlord, I am responsible for finding and vetting tenants, collecting rent, dealing with repairs and maintenance, and also complying with the local authority’s regulations and laws. While I can engage the help of property agents to assist me, I am still ultimately responsible for the success of my rental property business.
The most crucial component in rental property investing is to reduce the time between tenants. In a difficult market, we often see desperate landlords reduce rents to an extremely low level and that can be detrimental to their rental property business. On the other hand, furnishing your rental property can increase your property’s appeal and perceived value to potential renters.
In this article, we will discuss the benefits of furnishing your rental property and the different tiers of furnishing you can consider if you are tight on budget. Besides that, we will also explore how successful landlords ensure their furniture last longer with minimal maintenance.
Why should I furnish my rental property?
Furnishing a rental property can provide a number of benefits for both landlords and tenants alike. The main intention of furnishing a rental property is to make the property more appealing and livable to potential renters so that the perceived value of the place increases. Subsequently, this also increases the rental yield and business profitability for the landlord.
Let’s cover the main reasons why you should furnish your rental property
- Furnished properties generally have a higher rental price
- Furnished property reduces vacancy periods
- A furnished property attracts more renters because it is easier to move in
- Your furnished property will appeal to a wider range of renters
- You can charge a higher price by increasing the perceived value
- You can save on taxes when you replace furnishings
- You should expect less damage to your property, but not your furniture
1. Furnished properties generally have a higher rental price
If you are to explore the property listing platforms such as iproperty and propertyguru now, you will soon notice that the rental prices for furnished and unfurnished properties can be vastly different. It is rather common that furnished properties command higher rents than their unfurnished counterparts.
Tenants are willing to pay more for the convenience of not having to purchase and move their own furniture. In simple words, furnishing your property would make your tenants’ life easier as they do not need to spend time to source furniture, fork out the additional money, and arrange for transportation to move them into the home.
2. Furnished property reduces vacancy periods
In managing a rental property business, the longer the period between tenants, the higher your opportunity cost will be. I have worked with a number of landlords who through their years of managing properties had to learn the hard way that renting out their property cheaper can be more profitable than keeping them vacant in hopes of getting a higher rental yield.
To help you understand this better, say you own a property that is valued at RM 500,000 that you hope to rent out at RM 2,500 per month. Unfortunately, the economy goes into a recession, and the rental markets are performing poorly.
The market average for a unit similar to yours would now be renting out at RM 2,300 per month and you got an offer for RM 2,200 in the very first month of listing. Would it be better to accept the offer of RM 2,200 or to decline and hope for a higher offer?
To answer that question, we will have to work on mathematics.
Upon accepting the offer of RM 2,200 to rent your place, you would have successfully rented out your property in the 2nd month, giving you 11 months of rent with a rental return of RM 24,200 for the year (equivalent to 4.84% rental yield).
On the flip side, you declined the offer and only managed to rent out the property at RM 2,350 in the 3rd month just slightly above market average, this gives you 10 months of rent with a rental return of RM 23,500 for the year (equivalent to 4.7% rental yield).
Through this example, you should note that a 1-month delay in getting the place rented out will set you back by RM 700. Imagine, what will the rental return be like if it took you 2 months longer to rent out the place, or if the final offer for your place is only RM 2,250 after 6 months.
The bottom line, it is important to get your rental property rented out quickly with minimal vacancy period. This will add to the profitability of your rental property business and furnishing your property is an effective strategy to get your place rented out quicker.
3. Furnished property attracts more renters because it is easier to move in
For many renters, the idea of moving out can be overwhelming. Trust me, I know because I’ve been renting for the longest time despite owning some rental properties.
You have to remember that when a renter moves out from their place into your rental apartment, they are entering into unfamiliar territory, leaving behind the community and people they’ve come to love and cherish. On top of that, the thought of transporting a two-bedroom apartment’s worth of furniture is going to ring some alarm bells in their minds.
By providing a furnished apartment, you would be eliminating some of the key hassles that come with moving. There would be no need to buy bed frames and other chunky appliances such as fridges and washing machines. Besides that, your renters would not need to fork out thousands of dollars on moving trucks or furniture shopping.
4. Your furnished property will appeal to a wider range of renters
Furnishing a property can definitely make it more appealing to a wider range of renters, including corporate renters, vacationers, and those relocating to a new city for a short-term project.
While I might contradict myself, renters looking for apartments with long-term leases, leases longer than 1 year, tend to prefer apartments that are either unfurnished or semi-furnished so that they can select their own furniture.
Today, there is a growing demand in the rental market where people are looking for housing that comes with a shorter lease term. For example, college students completing a 6-month internship will likely prefer a short-term rental property that is furnished and easy to move in.
Regardless of the circumstances, there is an increasing need for furnished rental properties, especially in the city where job opportunities are and the hustling lifestyle thrives. When you furnish your property, you will be able to cater to a wider group of people, appealing to short-term and mid-term leases.
5. You can charge a higher price by increasing the perceived value
I am not going to say that furnishing your property is cheap, because that is far from the truth. While you can save some money by shopping at discount stores, furnishing your rental property will cost you quite a sizeable amount. For reference, a 3-bedder apartment of 1,000 sqft can cost between RM 20,000 – RM 30,000 to furnish depending on the style and intricacies involved.
Fortunately, these additional costs can be accounted for in your rental price and that is why it is really important to buy durable furniture that can withstand the worst tenants.
Generally, to determine how much you should charge for the furnished unit, a good starting point is to consider how much it would cost you to replace the furniture and when will you need to replace them. Amortizing the cost and adding it to the rental for a bare apartment is a common practice.
To help you with that thinking process, focus on how long will your furniture last and how much did it cost. For example, it cost me RM 20,000 to furnish my 3-bedder apartment and I expect it to last for at least 5 years. With that expectation, the amortized furniture cost will be RM 4,000 per year or RM 340 per month.
Assuming a similar apartment with zero furnishing gets rented out for RM 2,000 per month, I would ideally be asking for RM 2,340 per month or higher. To ensure I remain competitive in the market, I will also cross-check with listing platforms to make sure my property is as presentable if not more appealing while ensuring my rental rates remain competitive.
Remember, you can and should charge more for a furnished rental property.
6. You can save on taxes when you replace furnishings
In Malaysia, income derived from the leasing out of the real estate is taxable as business or rental income, respectively under paragraph 4(a) or 4(d) of the Income Tax Act 1967. The income is recognized as rental income if no comprehensive maintenance is provided in relation to the real estate.
The tricky part about rental income is that there are some restrictions on the things that can be considered income tax deductibles. To clarify on that, these expenses are not income tax deductible because they are initial expenses before the property is rented out,
- Expenses on improvement and renovation to be more attractive to potential tenants
- Professional fees to a property agent to obtain the first tenant
- Expenses paid on advertising to get the first tenant
- Legal cost and stamp duty for the first tenancy agreement
Once the property has been successfully leased out, any expenses on repairs and maintenance, expenses for replacement costs of furnishing, and renewal of tenancy are income tax deductible.
7. You should expect less damage to your property, but not your furniture
When you lease out your rental property as a bare unit, it means tenants will have to bring in their own furniture. This also means them working with a moving company that can be rather rough and careless, possibly damaging your property during the moving process. For example, moving a large couch through your single-leaf door may result in some scratches or dents to your doorways.
Also, renting out a furnished property to good tenants can also mean them being less likely to damage or mistreat the furniture that is provided. When the tenancy ends, it becomes much quicker for you to clean the place and have it staged for a potential renter.
However, this is only possible if you filter through and rent your place out to good tenants. If you do not know where to start, I’ve written a comprehensive guide for you in choosing the right tenant.
Is there a downside to furnishing your rental property?
We’ve talked a lot about the benefits of furnishing your rental property but it is by no means the perfect solution. Other than the obvious fact that furnishing your rental property will require a higher upfront investment, you should also consider the following,
1. Your responsibility as a landlord increases with the furniture
Put yourself in the shoes of a tenant, if you have recently moved into a furnished rental apartment and the bed frame is falling apart, whose responsibility will it be? Most likely you’d push the responsibility to the landlord to have it changed.
The same goes for situations where you rent out a fully furnished rental property. Your responsibility will most likely increase with the amount of furnishing you provide and it can be quite the hassle to manage and maintain them, especially if your tenant is a particular person.
Also, have I mentioned that the checklist for a furnished rental property needs to be thorough and detailed enough to resolve any disputes at the end of the tenancy?
2. It becomes really easy for your tenants to move out
Renting out an unfurnished property not only reduces the hassle and the potential for general wear and tear damage, but it also helps retain tenants for the long term. Having bought their own furniture and making the place home, tenants tend to stay in the property much longer than they initially planned.
For example, I have made the current rental place my home for the family and I’ve bought a few pieces of furniture. I decided that I needed a better television with a stereo system, better lighting, and a couple of cabinets for my book collection. As a result, I ended up investing some money into the place and now I would be considering my sunk cost in the place before I make any decision of moving out.
In contrast, a fully furnished rental property would not have similar effects on your tenants. The place is sufficiently equipped that it does not need any investment on the part of the tenant. Hence, the tenant would not consider his sunk cost into the place when deciding between places in the future.
Should I do semi-furnished or fully furnished?
We’ve covered that furnishing your rental property has multiple benefits including the potential for a higher rental yield. However, the question I am asked often by friends and aspiring property investors is “how furnished should I furnish my rental property?”
To answer that, you need to understand that semi-furnished and fully furnished rental properties tend to serve different segments of the rental market.
What is a semi-furnished rental property?
Generally, semi-furnished rentals are outfitted with fittings such as cabinets, ceiling fans, and curtain rods. They would also include the kitchen cabinet and other standard fixtures that are expected in a habitable rental. Renters will bring their own beds, couch, and other small furniture.
For landlords with a tighter budget, a semi-furnished rental property will be ideal for you because of the lower up-front cost. However, this would also mean losing out on renters looking for a turn-key solution, especially short-term vacationers.
What is a fully furnished rental property?
A fully furnished rental is a property that is rented out with all necessary furniture already in place. This typically includes items such as beds, sofas, tables, chairs, and appliances. The idea is that the tenant will not need to bring any additional furniture in order to live comfortably.
For example, the bedrooms will come with a bed frame, a cabinet, a mattress, and maybe a nightstand with a lamp. Depending on your budget, you can also provide linens to go with the bed but it is not necessary.
As for the living room, you can expect it to contain a couch, coffee table, ceiling lighting, and some decorative pieces such as carpet and wall paintings. In most cases, renters would also expect the place to contain a decent set of television for entertainment.
Either way, it is up to you and your budget to decide how well-furnished you would like your rental property to be. Personally, I would recommend providing the basic furniture pieces and having a statement wall to highlight the place.
How do I decide between semi-furnishing and full furnishing?
It is common to find fully furnished rentals popular for short-term leasing situations. As a property agent, I see a lot of fully furnished properties being leased out for short-term 1-year leases or for Airbnb purposes.
A short-term rental with full furnishing is ideal in the city where business travelers would frequent, staying for an extended period where it becomes expensive to stay in a hotel but not long enough to qualify for a long-term lease.
On the flip side, long-term rental refers to a lease with terms ranging from one year up to two years. In some cases, tenants may even opt to renew their tenancy agreement to stay for an extended period of 4 years or more.
Semi-furnishing is more receptive in the rental market for renters who plan to reside long-term as they would prefer adding their personality to the place, making the space their own. Having a semi-furnished rental property would allow them the freedom and creativity in choosing their furniture.
Final Word
Ultimately, furnishing your rental property or not is a personal choice. Besides the monetary concern, it is also important to identify who your rental property is meant for before deciding if a semi-furnished or fully furnished approach is better.
This simple checklist will give clarity on what are some of the basic amenities you will need in furnishing your property.
