A rate of return (ROR) – sometimes called return on investment – is used to measure the profit or loss of an investment over a period of time, typically expressed as a percentage. For any kind of investment, the goal is to always maximise your ROR to make a profit.
This is how ROR is calculated:
ROR = [ Current investment value – Original investment value ] / Original investment value x 100
Investing in rental properties is among the best and most common ways of making money in real estate. So, what’s considered a good ROR for rental properties in Malaysia?
The truth is, there are many answers to this question as it depends on various factors. In general, these criteria will help determine if your rental property is worth your time, effort and money:
A) Good location
Location is by far the most crucial factor that will make or break your investment. Rental properties that generate positive ROR are those that are accessible via major highways and located near facilities like public transportation, schools, colleges, shops, markets, restaurants and outdoor parks. These properties are also in areas that are experiencing population growth, with neighbourhoods that are clean and safe.
B) The right tenants
Quality, long-term tenants are critical to the performance of any investment property. Which is why it pays to be selective and not simply choose the first tenant that comes along, even if that tenant is your friend or relative. Compromising on your standards will cause you to lose more money in the long-term, which can crush your ROR.
C) The right property type
If your property meets the needs of your tenants, this will boost your ROR. Be sure to do your homework thoroughly to determine the demographics of your area of choice and what’s important and appropriate for the people there. For instance, if you’re buying in an area with a large student community, your property should be one that’s comfortable but not luxurious and easy to maintain.
D) Regular maintenance
Is your rental property well-maintained? This is another important factor that affects how much profit you’ll make. The better your property is taken care of, the more appealing it will be to prospective tenants, thus lowering the possibilities of vacancies or turnovers. Respond quickly to any maintenance needs. Don’t let small repairs linger until they become costly. Also, do what you can to anticipate any maintenance problems before they appear.
E) Healthy cash flow
It goes without saying that positive cash flow is key to achieving high ROR. Ensure your rental income is able to cover your loan repayments and maintenance fees. You should also ensure timely rent collection and adjust your rental rate from time to time, as taxes, insurance and other costs will change over the years.
One strategy that can potentially slash your mortgage payments is to purchase rental properties at below market value (BMV). This in turn will help improve your cash flow. However, finding the right BMV deal can be a complicated process. This is where Speedprop can help. Leveraging on artificial intelligence, our tools can provide you with privileged insights in a way human analysis can’t – enabling you to find undervalued properties like never before.
There’s no right answer to what a good ROR is. Market conditions change and every investor has different risk profiles. Ultimately, what makes a good ROR is dependent on your financial goals. And as long as your investment fulfills the criteria listed above, you will find success as a landlord and be on track to build long-lasting wealth.