Everyone wants to know how to determine a good location for property investment in Malaysia as much as anywhere else in the world. It’s one of the 3 most important things to consider when buying an investment property and in our opinion the most important of the 3. Most people considering purchasing a property, would already have heard the age-old adage – location, location, location.
The obvious trend is that the further away you are from KL city and mature areas in Klang Valley, the cheaper the per square footage costs. It’s hard to find anything new that’s close to the city for anything less than RM700 psf. You’ll likely find some great deals in new developments at Cheras or Puchong that can be bagged at RM500 psf or even less if you look at places like Kepong or Kajang. But do these places make good investments? First, we’d need to consider what makes an investment property a good investment. This is determined by two criteria – capital gains and monthly revenue.
People new to property investing will feel that capital gains is all that they are interested in and don’t consider the monthly pains of a monthly negative cash flow property. It’s always a good idea to make sure that your property investment is one that puts money into your bank each month. Robert Kiyosaki famously stresses that this is what makes a piece of property an asset, while the house that you live in, is not an asset. An asset, by his definition, is something that puts money into your bank each month – something that gives you a monthly revenue. For this to be possible, you need to be able to rent out your property for a sum that’s larger than the total of your monthly commitment that you are paying out each month.
So, this means that the total cost of your monthly commitment needs to be able to be covered by a tenant that can pay you more each month than what you need to pay out each month for your investment property. Location is what makes all the difference here. It’s necessary that you do your research on the location that you’re looking at to determine if your property investment is in the right location or not. Pick an area that has low demand and low rental rates and you will need to look for an investment property that is equivalent in terms of costs. The best way to do this is by looking at property price trends in an area and then comparing them to property rental rates in that particular location. You can do this on propertyguru.com and Airbnb with ease. When looking at short-term rental rates on Airbnb, make sure to have a look at the occupancy rates for the listings already there. This will give you an idea of how many days people are renting out the unit for each month.
Once you’ve had a look at the long-term rental rates and short-term rental rates (with a little math) you’ll be able to figure out if the location you’re looking at offers you a decent chance of earning enough from a tenant to cover your monthly commitment. This will let you know whether your property investment is in the right location.
But what about capital gains? Buying an investment for capital gains can be a good idea but with RPGT (Real Property Gains Tax), you’re likely to only sell in 5 years at the very least or have the government swoop in and take a nice chunk out of your earnings. 5 years means, 5 years of that property eating away at your hard-earned cash each month. 5 years is 60 months and if you’re property works out to be a net negative of RM1500 a month, that means that over those 5 years, your property commitment is going to cost you RM90,000. There goes another significant portion of your capital gains. I’m not saying that this is completely impossible and there is the fact that all Malaysians are given the opportunity to sell off one property in their lifetime without having to pay RPGT. It’s just that it’s a big risk taking on a liability in the hopes that it could one day turn a profit for you.
After all is said and done though, I’d prefer to side with Kiyosaki that when deciding how to determine a good location for property investment it should always be based on the monthly revenue. Capital gains is an added bonus that you get if you look for an investment property that is in a great location that has good upside potential. The tools are available for everyone to determine what is a good location for property investment. It just takes a little time and some math.