How to increase the return of an investment property to more than 20%?

We have acquired a rental apartment at the price of RM125,000 in end of last year 2008. The apartment was rented out in March 2009 before the completion of its furnishing work. Its monthly rent is RM1300. Initial annual return of this property was 8.54%. Later in this article we will show you how we increase its return to more than 20%.

A bad start
This is a 3-bedroom apartment located in Tampoi with amenities like swimming pool, gym, 24-hour security, badminton, basketball and tennis courts. The apartment’s name is Sri Wangi and the unit that we acquired is on the 4th floor.

We signed a sale and purchase agreement (SPA) with the vendor of this property in November 2008. However, due to the delay in loan application during the holiday season of December 2008, we decided to pay cash to buy this property. We managed to get the keys of the property in end of February 2009.

It was a bad start to us because we planned to finance this purchase. Using cash to buy a property is never our first choice because all properties that we acquired are properties that worth borrowing based on our analysis. (Read “Why you want to take up a loan for your real estate investment?” to find out what is a property that worth borrowing and how such property can give you the maximum return.)

We expected to rent the apartment for a monthly rent of RM1200 with fully furnished condition. We allocated RM15,000 for the furnishing cost. Estimated legal and brokerage fees were about RM7600. Management fee of the apartment with quit rent and assessment was around RM150 every month.

From the analysis using our property evaluation spreadsheet (which you can download it free by subscribing to our newsletter) as shown in the following table, the property would bring us monthly cash flow of RM1050 if we successfully rented it out for RM1200. We expected the annual return (cashflow yield) to be 8.54% if we used cash to acquire it.

RM1050 is quite a good cash flow but when we compare it with the total cash capital that we were required to put in (RM147,500), 8.54% is really not an attractive figure. We need at least 11.7 years to take back all the cash capital.

Take a look at the spreadsheet if we financed this acquisition. We could expect a return of 18.14% if we managed to borrow 90% of the purchase price from bank for a tenure of 30 years with interest rate 3.75% (see table below). This mean we would be able to take back our cash capital, which would be RM35,000 only in this case, within 6 years!

Turning bad luck into good luck
Although the expected return dropped significantly compared to the case if we financed the purchase, we decided to carry on with our plan to increase the value of this property – to furnish the apartment with the allocated budget.

During the week when furnishing work was undergoing in March, several prospective tenants were brought by our property agent to view the apartment. Two of them liked the apartment very much. One offered RM1200 while the other offered RM1300. We chose the latter.

The main reason why our apartment could be easily rented out even before we finished the furnishing work was that we had a reasonable budget for quality furnishing work. With that budget, we were able to use quality paint and purchase new lightings, furniture, electrical appliances and air-conditioner for the apartment.

Though simple designed and configured (see figure below), tenants like our way of preparing the best for whoever is going to stay in the apartment.

We were not happy, yet, with the RM100 more–than-expected rent. We negotiated and asked for discounts from lawyer, agents and contractors. We managed to reduce the furnishing cost, legal and brokerage fees to RM14,000 and RM5700 respectively.

Not only that, we are now going to finance this apartment. The tenancy agreement signed in the middle of March 2009 now becomes a very strong supporting document to prove its increased value to the banks since the apartment is generating income by itself.

Marching toward more than 20% annual return
Look at our spreadsheet right now (see table below), if bank loans us 90% of the purchase price, with the saving in furnishing cost and fees, the return of this apartment now jumps to 23.5%!

This is not the end yet. We decided to ask banks to perform new valuation on the apartment instead of using its purchase price in order to maximise the loan amount. Several banks like Standard Chartered and CIMB banks came back to us and told us that, the value of this property is now between RM135,000 to RM150,000.

Based on banks’ valuations, we are able to loan at least RM120,000 from them. In return, we will be able to increase the return of this property to 29% since the loan amount is effectively 96% of the purchase price now (see table below)!!!

Once we get the RM120,000 from bank, our cash capital will be reduced to RM24,625, and we still have a monthly cash flow of RM590. In other words, we will be collecting RM7080 from this property every year and within 3.5 years we should be able to take back all our cash capital RM24,625.

Of course, the above estimation is based on the assumption that the apartment will be continuously rented out. Also, tax on the rental income is not considered.

So, what do all these mean to you?
From this real life case, we demonstrated the three advantages of real estate investment to you as discussed in “Why real estate is a good investment?”:

1. Cash flow – we collect cash every month as a rental income from our rental property. In this case, we collect RM590 every month for a cash investment of RM24,625.
2. Leverage – we reduce our total cash capital by financing/refinancing our property and in return leverage the return. In this case, we improve the return on investment (ROI) from 8.5% to 29%.
3. Control – we actively control to increase the value and then the return of our investment property. In this case, we furnished the apartment so that it can be easily rented out for a higher rent and valued for a higher valuation.

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We write regularly about real estate investment. Some of our featured articles include:
“How to know if a property investment is worth investing?”
“How to estimate the value of a property?”
“How to find good real estate/property agents?”
“What must you know before buying auctioned properties?”
“Why apartment can be the best real estate investment?”

(Also, don’t forget to subscribe to our newsletter to receive a property investment evaluation tool. You can use this tool to estimate monthly cash flow, monthly installment and return on investment for your property. This tool will also show you if a property investment is worth borrowing/leveraging.)

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Related posts:

1. Is it possible to have an infinite return on investment (or free money)?
2. How to turn a property to become worth borrowing/leveraging?
3. What risk you may face if you borrow too much and how to manage it?