We all know that rental property is one of the many ways to having a passive income. However, being a landlord is not easy and not all landlords will succeed in the long term. Combined with the weak property market fuelled with an oversupply of serviced apartments, renters are spoilt for choices while landlords are left fighting for survival.
With this situation in sight, is profitable landlords a myth? Can individual investors really be profitable through rental properties? The truth of the matter, YES! Individual investors like us can find success in our property investment as profitable landlords. While it is not easy, it can happen if you understand the truths behind profitable landlords and how they manage their rental businesses.
As a general rule, profitable landlords are business owners who treat their rental properties as rental businesses. They have a good understanding of the numbers when it comes to the maintenance cost, rental tax exemption, tenant management and has proper bookkeeping to back it up.
Profitable landlords are on top of everything, this includes the needed maintenance and claiming for late payment fees. If you aspire to be a profitable landlord, it is best to avoid rookie mistakes and appreciate the truths behind profitable landlords.
1. Not all rental properties have a net monthly income
Not all rental properties today will yield a net income at the end of the month. That does not mean the property is a terrible rental property, it simply means the property has not reached its maturity. A net income is driven by several factors, this involves the monthly instalment paid to the bank, the maintenance cost needed and the rental collected for the property.
For a rental property to yield monthly net income, the rental should be higher than the combined cost of the monthly instalment paid to the bank and the maintenance cost needed to upkeep the place. If you can bring down any of the cost factors, you will be able to quickly turn over a monthly net income.
For most profitable landlords, the long term goal is to make substantial investment returns on the purchased properties. The rental income is one means to pay off the monthly instalment to the bank while they bide time for the capital appreciation on their properties. If the property is tenanted, it is as good as having the property paid for by the tenant, taking the financial burden away from the investor.
If you are looking for a monthly net income from the rental properties, perhaps it is ideal to pay more upfront capital for the property. By borrowing less money from the bank, you will be able to reduce your monthly instalment so that the rental income will yield a positive cash flow every month.
On the other hand, if you do not have much savings in the first and really need to rely on a higher financing margin, you can also consider taking up a flexible loan where you pay more monthly to clear off the capital borrowed. This will reduce the capital base used in the interest calculation, effectively reducing your monthly instalment to the bank. You will not see an immediate reduction in your monthly instalment, but certainly, it will be beneficial in the longer term.
The good thing about Flexi-loan is the flexibility to take out the additional money paid to reduce the borrowed capital. This is in contrast to paying more as a down payment for the property. In such a situation, your cash liquidity is stuck with the property. If you require emergency funds, you will need to rely heavily on your own savings or liquidate the property.
2. Finding the right rental property
If you want to become a profitable landlord, it is important to keep emotions and business apart. It is easy to let our emotions drive our decisions especially when we see a beautiful property up for sale. However, if the property does not yield a good rental return, then it is really not worth considering.
Likewise, a bargain price tag does not always mean a good rental property. This is especially true if the property is located in a neighbourhood with low job opportunities and few amenities. Without paying tenants, a cheap property will not make for a good rental property.
Hence, a profitable landlord needs to be well-versed in the real estate market. While I do appreciate the trills and excitement in hunting for the next up and coming location, perhaps it will be better for aspiring investors to really focus on 1 – 2 neighbourhoods with promising job opportunities and demand.
To make sense of the market, you need to know how much people are willing to pay for rent in the area and different properties. Be it a 3-bedder residential unit or a retail lot up the alley. At the same time, it is also important to consider the surrounding amenities, be it public transport, school, restaurants or retail shops.
If the property and location do not strike you as a liveable area, then you should move on to the next neighbourhood. Ideally, a good rental property should attract tenants who can pay their rent on time.
3. Rental property is a business
Being a profitable landlord is about managing your rental properties like a business. Like it or not, rental property is a product prepared and marketed by the landlord. If the product is helpful and fairly priced for all the services it can provide, then there will be demand from the customers – the tenants in this context.
If a business intention is to attract customers to get repeat purchases, then it is really crucial to ensure the product is well prepared, helpful and fairly priced. The profitable landlords appreciate this fact and typically will ensure the property is well-maintained and sufficiently comfortable for the would-be tenants.
At the same time, profitable landlords are also well respected and reachable. While it is not about making friends with the tenant, it is equally important to establish a good understanding and be reachable by the tenants. This helps to keep the landlord informed of the property’s condition while keeping the tenants comfortable enough to stay on for extended periods.
You might want to be careful not to establish too close a relationship with tenants. Having a well-respected relationship helps to ensure smooth and timely transactions. However, if you are too close to tenants, they might feel that it is alright to overstep their boundaries and start paying rent a little late. Having too close a relationship with tenants can also make it difficult to increase rent, despite the increase is in line with the current rental rates.
4. Screening tenants is important
Profitable landlords run a profitable business because they understand the importance of thoroughly screening tenant profiles. While it can be really tempting to take on any tenant especially when the property is vacant for a while, skipping this process can cause potential problems to yourself and the rental property in the future, such as expensive makeovers and evictions.
Most tenant applications will look good on paper but it is risky business to trust their words wholly. Successful landlords have their own screening system to filter out tenant profiles – to validate information shared on the application. In some cases, landlords will get applying tenants to share the below details,
- Employment details – To ensure tenants can afford rent payment, most landlords require that a tenant earns 3 times the monthly rent from their jobs.
- Employment outlook – If a tenant is to have long periods of unemployment, it can be difficult to collect rent at those time.
- Willingness to pay on time – Some landlords receive post-dated cheques as an assurance on the rent payment.
- Cleanliness and housekeeping skills – Take a quick peek at how well they maintain their cars, it tells a lot about their cleanliness.
- Aversion to crime, drugs and other illegal activities – The last thing you want as a landlord is to be at the local police station for a crime on your property.
As a general rule, screening a tenant’s profile is important. Having a proper tenant screening system can prevent unnecessary damages to the business. There are no guarantees when it comes to tenant quality but this system will help you decide the kind of tenants you are bringing into your property.
5. Keep your turnover as minimal as possible
A successful landlord will make it his priority that no property under his watch is left vacant for extended periods. The expenses of turning over a unit can quickly add up (advertising, cleaning and mortgage) and the longer the unit is left vacant, the more expensive those expenses will be.
If you have a well-paying tenant that takes good care of your property, it will be better to keep them for as long as possible. While it is ideal to raise rent to be in line with current rates, it does not make sense if this raise chases out the tenant and the property is left empty for long periods.
From my observation, successful landlords will typically have a negotiation with their tenants a few months before the lease agreement ends. The key intention is to convince good tenants to renew their lease while trying to maintain a fair rental rate.
On the other hand, rushing to fill an empty rental property without going through tenant screening can be a detriment to your business. In comparison, the cost of screening a tenant’s profile is inexpensive whereas to evict a terrible tenant involves a lawsuit and eviction letter – 3 to 6 months court session that cost RM 7,000 – RM 25,000 to the landlord.
6. Price accordingly with the market rate
Typically, you want to be asking for a fair rental rate for your rental property. It is always good to benchmark your rental property against other similar listings. If the nearby listing is asking for $1,500/month for a poorly furnished unit, perhaps your well maintained and furnished unit can fetch a 15% premium.
Ideally, you want to match your pricing with the value your property brings to the tenant. If your price is too high, then you lose interest from potential tenants. On the other hand, price yourself too low and you will find yourself struggling as the landlord. Below are some factors you want to consider when positioning yourself in the market,
- Benchmark against listings within the same residential compound / condominium
- Understand what other 3-bedders / 2-bedders are asking for in the market
- Furnishing condition – Well maintained and adequately furnished property can typically demand for better premium
- For properties within the city, having an additional carpark can demand for better rental
On the other hand, it is equally important to ensure rents with existing tenants are kept to current market rates. While it might be awkward to raise the rent on a good tenant that has been around for a while, there is no room in business for being shy. In fact, not raising the rent to the current market rate is one of the reasons why some landlords are not profitable in the long run.
If the raise is not a substantial amount, most tenants do not mind sticking around as long as the rent is a fair price. In most cases, tenants move out after rates go up because they are already dissatisfied. Regardless if you raise the rent or not, they will still most likely leave.
7. Invest in upgrades that add value to your rental property
If you are looking to attract quality tenants who are willing to pay a premium, then you as the landlord must be willing to invest in upgrades that add value to your rental property. However, to be a profitable landlord, you must be smart to decide which upgrades will add value to your rent while avoiding unnecessary expenditures that do not attract tenants.
Understanding the tenant’s motivation to rent can be really helpful. If you are looking to rent out your rental property to a family, then the kitchen is a good place to consider upgrades. Having better cooking appliances can attract higher-paying renters, as it will most likely be the hub of the household. At the same time, having a simple but well-designed living room can really attract young couples who intend to have friends over for game nights.
Improvements should be well thought out after considering the target tenants. It is really easy to go over budget when it comes to upgrades and hence, the importance of understanding the needs of your target tenant. At the same time, upgrades do not need to be expensive. A well-designed living room can be achieved with the help of proper lightings, comfortable but inexpensive sofa sets, with a final touch of a complimenting rug.
Typically, profitable landlords know and understand the need of their tenants. Their rental property is complete with upgrades complimenting the needs of their target tenant to attract quality tenants who can pay better.
8. Maintenance should not be ignored
The willingness to address rental property maintenance is one of the key factors that set profitable landlords apart from mediocrity. Not addressing maintenance issues can quickly lead to bigger and more costly unavoidable fixes, setting a landlord back by a substantial amount for repairs.
What may have started as a simple pipe leak that goes unfixed could quickly become a health issue involving mouldy walls and damaged furniture. If the landlord had been willing to spend an easy $20 – $30 to fix the leak, he could have averted a major makeover that easily cost $400 – $500. Hence, it is really important to have open communication with the tenant on the issues going on within the property.
Ideally, a good landlord-tenant relationship is cooperative. Maintenance repairs can be inconvenient for a tenant, but if the landlord is trusted to be respectful of their time, tenants will oftentimes be willing to accommodate for repairs. Staying on top of maintenance is also an indicator to the tenant, the property condition is expected to be returned.
A well maintained rental property is always good to attract an existing tenant to renew their lease agreement. This reduces the hassle and marketing cost required to get new tenants coming into the place. On the other hand, a property in good condition will much more likely attract better quality renters, ensuring your property is well maintained in your absence.
9. Be well versed with rental income tax and the exemptions
Taxes can sometimes be the deciding factor if your rental business is profitable or not. If you do not pay attention to expenses, income, depreciation and deductions, not only are you losing out on all the possible tax breaks, you also risk being in trouble with the Inland Revenue Board.
If you have no idea where to begin when it comes to real estate tax, then I advise you to get some professional help in planning your tax. As a general rule, below are some of the items you can deduct from your tax filing, here in Malaysia,
- Assessment tax
- Quit rent
- Interest on home loan
- Fire insurance premium
- Expenses incurred on rent collection
- Expenses incurred on rent renewal
- Expenses on repairs and property maintenance
Whilst it is nice to be earning passive income from our rental property, we should not forget that rental income is taxable under the government ruling. To avoid the tax penalties, it is wise to be well versed with rental income tax. Having a good tax advisor can also help you benefit from the tax exemptions available in different states.
10. Be organized with proper bookkeeping
Not having an organized system of bookkeeping is a common pitfall among aspiring landlords. Like any business, profitable landlords pay meticulous attention to having proper paperwork on each of their rental properties and the tenants. This gives them a good understanding of their rental business and prepares them for tax filing.
Having good paper trails is important when dealing with finances, from tracking maintenance expenses to the rent collected on each rental property. This information is helpful to avoid improper payment of taxes that can lead to all sorts of auditing concerns and tax penalties. On the flip side, having a proper record of expenses can help you understand which of the tax relief your rental business is eligible for.
It is my recommendation that aspiring landlords keep a file on each rental property that the following information,
- Signed lease agreement
- Tenant information and reference
- Record of rental payments by tenant
- Record of property tax and insurance payment
- Copies of insurance policies
- Property title, certificatiions and necessary inspections
Paperwork for rental property can be a nightmare if not implemented from the beginning. However, having a proper paper trail and being organized can be really helpful in any unexpected legal or tax conflict. Having a digital backup of your document is also a wise thing to do in case the document is lost or damaged.
Final Word
Honestly, it is simple to be a profitable landlord. The 10 truths shared with you are my observation of what sets apart a successful landlord from mediocrity. It is nothing special but it does require commitment and appreciation that rental property is indeed a business and it has to run like a business.
If you want to be a successful landlord, then you need to treat your rental property as a business. Create value for your tenants through your rental property while having good bookkeeping on the expenses and incomes.
Until then, take care.
