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Relocating abroad, or upgrading to a bigger house? Or perhaps you’ve just received the keys to a newly completed property. At this juncture, you are faced with selling your property and making a capital gain, or renting it for continuous rental income. Here are the pros and cons of selling or renting and how you should weigh your options.
Selling
Selling at a price that is higher than your purchase price enables you to enjoy a capital gain and frees up some of your capital, says Tang Chee Meng, chief operating officer of Henry Butcher Marketing Sdn Bhd.
Selling also relieves you of the financial burden that comes with owning a property. “As the owner, one has to cover certain annual expenditure such as quit rent, annual assessment and insurance. Monthly maintenance fees must be paid if your property is a strata-titled unit or located within a gated and guarded community, notes Tang. Those who have taken a loan to finance their properties will also be relieved of the burden of paying monthly loan instalments, he adds.
When considering this option, evaluate costs that are involved in transacting a sale. “Take into account the legal fees, stamp duties and interest incurred during the construction period [for those buying from the primary market]. If you sell a completed property, you may have to pay agency fees, which is almost 3% of the selling price (2.75% on the first RM500,000, and 2% on the amount over RM500,000), and legal fees, which is calculated based on a scale ranging from 0.4% and 1%,” says Chan Ai Cheng, general manager of S.K. Brothers Realty (M) Sdn Bhd. If you’ve taken up a loan with a lock-in period, you will have to pay penalty interest, which is typically another 2% or 3% of your loan amount.
Real property gains tax (RPGT) of 5% will also eat into your profit margin if you are selling your property less than five years of acquisition. Those who renovate their property may not be able price in the renovation cost, adds Chan.
Closing the sale of a property can also be time consuming. “Depending on the location of one’s property, completing the sale can take a bit of time. Then, you have to wait at least three months for the completion of the sale and purchase agreement. During this time, you have to continue to service the interest on your loan, or pay maintenance charges until the day you hand your keys over to a new owner,” says Chan.
Renting out
Renting out your property allows you to keep your real estate asset and derive a continuous revenue stream. If a mortgage is taken to fund the purchase, the rental yield, loan tenure, downpayment and monthly loan instalment will determine whether you are generating a positive cash flow.
“For example, the likelihood of getting a very exciting rental return on a landed terraced house is not high,” Chan says. “For instance, a two-storey house in Bandar Utama cost around RM900,000, but the monthly rental is only about RM1,500 to RM2,000. This translates to a yield of approximately 2% to 3% a year. You also have to pay to install some lights, fans and basic kitchen cabinets and evaluate if your tenant can maintain your property. Otherwise, you might need to do some repairs when he leaves.”
Commercial properties, however, do not require renovations. “Tenants can do their own renovations. And, since it is a place where they do business, they generally take better care of it, compared with a residential property,” observes Chan.
Another drawback of renting out is the duties that come with being a landlord. “Landlords have certain obligations such as attending to the tenant’s complaints, request or repairs. You will need to spend some time attending to the tenant’s requests as well as collect rent,” notes Tang, adding that there are risks to becoming a landlord as well. “Landlords face the risk of tenants defaulting on their rents or not settling their utility bills upon terminating their tenancy. This leaves the landlord with unpaid utility bills. Worse, there are tenants who damage property. When such a tenancy ends, the landlord may have to spend a large sum to repair the damage.”
Darian Lim, associate director (tax & financial consulting) of Great Vision Wealth Management Sdn Bhd, points out that one needs to consider one’s capability in managing a tenant. “Regardless of your rental yield, do you have experience in managing property? How are you going to manage when a problem arises? We have seen people having nightmares with managing tenants. If you don’t like the headache, you’re better off selling it.”
Appointing a property caretaker to collect rent and manage a property comes with a cost. “You need to invest your time and effort in managing the property and tenant. If you don’t have the time, most people will outsource it to a real estate agent. This effectively lowers your returns,” says Dave Chay, also an associate director (tax & financial consulting) of Great Vision Wealth Management Sdn Bhd.
Evaluate the returns
Ideally, one should estimate the capital growth and rental market in the surrounding projects before making a purchase. This can be done by talking to developers and estate agents. “On day one, ask yourself if you want continuous income stream or capital gain from the property,” suggests Chan. “Decide on your targeted gains. If you want to rent it out, how much are you willing to rent it out for? If you want to sell, how much money do you want to make?”
Even if your initial objective for the property has not changed, it pays to do the math to see which option makes better financial sense. Consider the market value of your property to see it is enough to cover the cost of selling. “For a newly completed property, capital growth is generally about 30%. If you are offered anything more than 30%, you can consider selling it. Chances are, you would have already made some money even after deducting the cost of selling,” says Chan.
She believes that it is better to lock in your gains in the present. “If you can get the cash today, it’s better than hoping for future gains.” However, this very much depends on the location of your property. “In certain locations, the value of properties appreciates steadily. Yet, this may not directly influence the rental income that is generated.”
Another option is to keep your property vacant. While this may not give you any financial gains, you get to keep the property and avoid the hassle of renting it. Keeping it vacant also has its own set of problems. “A property tends to deteriorate very quickly when no one stays in it. If it is a landed property, someone may steal your gate. If it is a high-rise property, you still have to pay monthly maintenance fees,” says Chan.
Doing the math
Sharon bought her first property at RM250,000 in 2003. She is now being posted overseas for three years. At this moment, she is not sure whether she will stay overseas permanently or return to Malaysia after the three years. She has received an offer to sell her property at RM390,000. The rental of her property is RM900 a month. Her mortgage is as follows:
Property cost: RM250,000
Downpayment: RM25,000
Mortgage: RM225,000
Loan tenure: 25 years
Interest rate: 6%
Monthly instalment: RM1,450
Outstanding loan amount as at Dec 31, 2010: RM185,120
Based on the calculations below, selling appears to be the better option for her. This is based solely on the financial considerations and other factors such as potential capital appreciation and Sharon’s future needs for the property.
Assumptions:
Rental yield (based on cost):
RM900 x 12 ÷ RM250,000 = 4.32%
Rental yield (based on market price):
RM900 x 12 ÷ RM390,000 = 2.77%
Annualised rental appreciation rate (compound): 5.72%
1) If she sells: Amount (RM)
Property selling price 390,000
Less: Outstanding loan (185,120)
Net amount 204,800
She has excess cash flow as she does not have to pay a monthly mortgage.
RM1,450 x 36 months = RM52,200
Assuming Sharon chooses to invest her capital gain and the amount that she “saves” from her monthly instalments. At a nominal annual return of 6%, Sharon’s expected total return after three years is RM302,403.
2) If she rents out
If she rents out the property at RM900 a month, these are her finances after three years: Amount (RM)
Monthly loan instalments 1,450
Less: Monthly rental received (900)
Monthly net cash outflow 550
Total cash outflow for the next three years 19,800
Property value after three years @ 5.72% annual appreciation 460,825
Outstanding loan after three years (164,505)
Net cash 296,320
Less: Cash outflow during the three years (19,800)
276,520
Note: Transaction costs such as legal fees, agent’s fee and lock-in loan penalty have not been taken into account for the “sell” scenario below. Meanwhile, quit rent, assessment, maintenance fees and insurance are excluded from the “rent” scenario.
Calculations by Dave Chay and Darian Lim, both are associate directors (tax & financial consulting) of Great Vision Wealth Management Sdn Bhd
This article first appeared in the December 2010 issue of Personal Money
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 844, Feb 7-13, 2011
