Short term rental management has been a hot topic lately, so we decided to clear out some misconceptions and confusions regarding short term rental management.
To understand the topic in depth it is important to first understand the relationship between rental yield and capital appreciation.
We all know for ages that property will always grow in price and we all also want our properties to appreciate in value. But what is more important is the availability of buyers in market who can afford your property.
DAVE CHONG
IQI GROUP VICE PRESIDENT & FOUNDER OF IQI ELITEONE
BUYING PROPERTY
Buying a property isn’t a piece of cake; there are two most important factors which are of key significance. First being “initial capital” and second, “monthly investment”.
Most people on the planet will have to get a loan to buy a property or piece of land; this is applicable for majority of the world population.
When your loan has been approved you will have to pay a 10% down payment of the total value of the loaned amount. This 10% down payment is your “initial capital”.
Afterwards, you will be paying a monthly installment of your loaned amount which can be termed as “monthly investment”.
For example, if you are buying a property worth 500,000/- you will have to pay 50,000/- as initial capital and pay 1,700/- monthly that is your monthly investment. The point if this calculation is whether you can you pay 1,700/- monthly or not? This determines your buying power for that specific property.
Here is a reverse calculation for a similar case, this way you can also determine how much a property is actually worth.
| Property Price | 90% Loan | Monthly Investment 35 Years @3% |
| 577,777.78 | 520,000.00 | 2,000.00 |
If someone is paying a monthly rent of 2,000 that being reverse calculated, the loan amount is 520,000.
The property price on the other hand at 90% loan will be 577,777.78/-
To make it more clearer, if the above property that we took as our case can be rented out at 2,000/- it can be priced at 577,700/-
This has nothing to do with the value of the property, in fact this is calculated on the basis of affordability, and can people actually buy the property.
The rental they are or will be paying (which is 2,000) can actually cover the monthly installment of the loan; hence the property is affordable for them.
Imagine if you are living in this house and paying 2,000 monthly as rent, then why not go for buying the property for yourself? If you have plans to stay in this house for a long time to come, is it not better to pay the same 2,000 in monthly loan payback installments, and have that house for yourself in future?
So, here is what you can do now:
| Property Price | 90% Loan | Monthly Investment 35 Years @ 3% |
| 635,555.56 | 572,000.00 | 2,200.00 |
| 693,333.33 | 624,000.00 | 2,400.00 |
| 751,111.11 | 676,000.00 | 2,600.00 |
You can calculate your potential capital gain with the help of assumed rental rate that might be on the basis of what people are paying for the similar property in nearby areas.
For example, a property in South Link that is being rented out at 2,200/- can be possibly evaluated at the price of 635,000/- with the help of reverse calculation.
As we already know that property value will appreciate in years to come, it is also important to understand that the monthly rent someone might pay for that property will also appreciate.
Let’s say the 2,200 rent you were paying for the South Link Unit will be 2,600 in the period of 10 years, this automatically means that this property will be valued at something around 751,000/-
AFFORDABILITY OF PROPERTY
After understanding the above case and calculations, it can be determined whether a property is affordable or not.
If a family is willing to pay their 30% of household income on rental or monthly loan payback installments and have a monthly earning of around 10,000 they can afford to buy or rent the above property.
THE NEW TREND IN SHORT TERM RENTAL - AIRBNB
Here’s this new trend going on these days, which is short term rental. People are boosting their rental yields by doing short term rentals on top of normal rental.
In this case if your rental yield is good, you will end up increasing the total price of that property.
| Daily Rate | 300 | RM |
| Occupancy | 20 | Days |
| Total Revenue | 6,000 | RM |
| Expenses | 1,200 | RM |
| Net Profit | 4,800 | RM |
| Daily Rate | 300 | RM |
| Occupancy | 15 | Days |
| Total Revenue | 4,500 | RM |
| Expenses | 900 | RM |
| Net Profit | 3,600 | RM |
AirBnB is pretty much in market and is helping people increase the ultimate value of their property by renting out on daily rate.
Let’s do some math now on how you can increase your property’s value. If you rent out your property on a daily rate of 300 for 20 days, you will end up with 6,000. You will now have to pay few fees like AirBnB service fee and cleaning charges, which is normally 20% of the total revenue.
In case of lower occupancy, let’s say like 15 days, your revenue will be around 4,500 with expenses of 900 and net profit of 3,600.
| Property Price | 90% Loan | Monthly Investment 35 Years @ 3% |
| 866,666.67 | 780,000.00 | 3,000.00 |
| 924,444.44 | 832,000.00 | 3,200.00 |
| 982,222.22 | 884,000.00 | 3,400.00 |
| 1,040,000.00 | 936,000.00 | 3,600.00 |
With same reverse calculation we have been doing before, the property can reach the valuation of upto 1,000,000 if you can get 3,600 net profit per month from it.
If you got the loan to buy this property and then rented it out for a short term loan on AirBnB, you can easily pay the monthly loan installments by also owning the property.
Commercially, it is the best thing to do to actually own a property, which can be loaned out and paid-off in many ways. You can even increase the value of your property by making some right decisions and right time and get the maximum benefit out of your property.