Would you rent if the rental is too high?

Would you rent if the rental is too high?

I love to ask this following question to the participants during my talks. Which one do you prefer? Higher property price appreciation or higher rental yields?

Usually, the answer is I want both. Great answer. Does not happen, sorry. (I know some courses say it is possible. Sure, go and follow that course and do well. No one is stopping you yeah).

Coming back to the answer. Price appreciation and higher rental yields do not happen at the same time. At least not within a short period of time. Please allow me to explain very briefly.

Property Price can rise with every transaction

Property prices could rise with every transaction. In good times (bullish times), your neighbour on your left sold his unit for RM400,000. Your neighbour on the right knew about it and sold his unit at RM420,000 three months after.

You got to know about it and 6 months after your neighbour on your left, you sold your unit for RM440,000. Property price for this same unit has just oved up by double digits within the same year. These price movement was definitely not because of salary becoming higher suddenly or raw material prices go up suddenly. These are secondary units… remember?

Property price can drop with every transaction

In a slow market, your neighbour on the left sold his units for RM400,000. Even assuming the potential buyers know about it and went to view your neighbour on the right’s unit, will your neighbour on the right sells his unit for a lower price at RM380,000?

It depends on whether he could hold or how desperate he is, right? If he could hold, then it is almost a certainty that the price may actually be the same; RM400.000. If the home has better renovations, the price could even be higher.

If he could not hold, then it has got nothing to do with the market, it’s because of him… Even during a good market situation, to sell immediately, he would still have to sell lower…

What about rental then?

Now we look at the rental. Your neighbour on the left rented out his unit at RM2,000. The neighbour on the right knows about it, so what do you think the rental will be?

RM2,000 lah, similar. When you try to rent out your unit, on the same floor, how much would the rental be if everything is similar? RM2,000 loh…

So, within that same year, the rental will be almost the same and is not going to move up just because of different transactions. Unless of course the demand rose suddenly for that area or someone is renting out a tastefully designed unit. Else, if conditions are normal, the rental will be the same for the year.

What happens 12 months later? (after contract ends?)

What happens the next year then? Maybe, your neighbours could increase the rental by 5%, then you could also increase the rental by almost the same number. This is why rental increment is way slower because it’s yearly most of the time versus the price increase which could happen with every transaction.

If house price stayed the same, rental yield slowly increases

If we purchased the home 5 years ago and the price have stayed almost the same, then with a slowly increasing rental over the last few years, our rental yield slowly increases. It will come to a point whereby the rental yield could be double digits just because you bought the property much earlier.

Someone who bought the same property as us but they bought it recently, the price would have increased. Thus, the rental yield for this new owner is going to be way lower than us. In effect, someone who bought 5 years earlier would have both the capital appreciation (price increase) and also an increasing rental yield (slowly increasing rental every year).

Look at rental yield first before matching it to the property price we are buying

There are enough information on the market to indicate if we are overpaying too much for a property. When the property price is too high and the rental is too low, the demand for that property at that price will be slow. Buyers would not want to buy and then having to top up every month. The owners who still want to sell would have to lower their selling price. This is why sometimes, we can get a value buy.

Would you rent if the rental is too high? The answer is no. You would rent somewhere else instead.

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