Why Not to ‘Invest’ in a Rental Property [Under-Con]

Buy a property, everyone seems to say, its a good investment.

Our parents tell us to do so and do your family, friends, and colleagues. Let’s not even start with the Property Gurus and Seminars, telling you to build a ‘property portfolio’ and retire early.

I’m fed up with the rosy advice that only tells you the bright side of property investing (making a profit when you sell it years down the line) but never sharing what you have to go through in between.

I’ll share my personal experience of what I’d had to go through when I bought a property under construction or colloquially known as ‘Under-Con’ and what I had to go through to eventually secure a tenant.

I’m not comfortable in reveling my exact property address nor the price. But the numbers provide you with a rough idea of what to expect when you get an Under-Con property yourself.

Let’s get started:

Low Cost of Entry

Photo by Derick Anies on Unsplash

It’s easier to buy an Under-Con property compared to a used (Sub-Con) property as you don’t have to fork out the 10% down payment and legal fees, which makes this a popular choice for young adults and couples low on cash reserves.

Typically for Under-Con properties, you’ll only have to pay the booking fee, which varies from as low as RM 1,000, all the way up to RM 15,000. The rest of the 10% charges and legal fees are typically ‘rebated back’ by the developer.

But you’re smarter than that and won’t be fooled. The developer is not giving anyone free money. All the money that you’re supposed to pay, the 10% down payment, legal fees, rebates, cashback, and free furniture are secretly marked up in the selling price and end up in your mortgage loan.

Progressive Payments

Photo by Jungwoo Hong on Unsplash

Let’s say you buy a brand new property straight from the developer at RM 430,000. The agent calculates your monthly mortgage to be RM 2,000.

It takes 3 years for the developer to build your property from scratch. During construction, you’ll have to pay the progressive interest to your bank.

What that means is, your bank will release money in scheduled stages to the developer. 10% + 15% + 10%…. all the way till they release 100% of the loan amount that you agreed to borrow.

The interest payment maybe starts around RM 70 a month. Then a few months later, you’ll get a letter saying that the bank released more money to the developer (as scheduled), and now your monthly interest payment increases to about RM 150 a month.

The interest payment keeps increasing every a couple of months until 100% of the loan amount is released to the developer, at which, you’ll have to start paying the full monthly mortgage of RM 2,000.

Mind you, during this whole 3-year construction; you can’t do anything to the property. Can’t rent it out, can’t sell it. So you’re stuck paying the monthly progressive interest and pray to dear god that the developer doesn’t run away with the money or go bankrupt.

Checking for Defects

After paying interest for 3 years, you finally got your keys! But hold your horses pal, you’ll need to inspect your brand new home to check for any manufacturing defects (there’s usually many) as it’s still under warranty.

Some defects are easy to spot. Like shoddy paint jobs:

Low quality paint work in my bathroom

Others can only be realized over time. For example, look at the pictures below. I had no idea that my walls were so unevenly messed up. I never realize any of this during my first few day time visits.

I’ve only noticed about the uneven walls after I’ve installed blackout curtains and the downlight on the ceiling:

Some defects you’ll only realize at night, some only when you take a shower, and some only when you try to cook. It’s a good idea to spend a couple of nights actually living in your new home to get a feel of the place.

After a few backs and forths with the management office for repairs, and cleaning up the mess, its time to install lights, ceiling fans, curtains, and furnish the place up.

Shopping for light fixtures

This calls for several trips to the lamp store, IKEA and other furniture stores. Do not underestimate the amount of time and energy needed for this. All this will take up another 1 to 2 months to complete.

Renting the New Property Out

Great, the place is all set up, it’s time to find a tenant to help you pay your mortgage. Unfortunately for you, most of the owners are also investors. They all want to rent it out as soon as possible, for as much as possible, just like you.

Can you rent your place out at the same price or more than your mortgage (RM 2,000)? The only way to figure that out is to check the market price on iproperty and propertyguru.

At first, you’ll notice that all landlords are setting their rental price as close to their mortgage payment as possible (let’s say RM 2,000 in this example).

Putting yourself in the shoes of the tenant, they are shopping around for the best deal. They know that all of the owners just got their keys and are all finding a tenant. The ball is in their court.

Depending on the owner’s holding power, some will lower their rental a bit below the market average to quickly secure a tenant. For example, if the average rental price is RM 2,000, and you’re the only one renting out at RM 1,900, that’s a no brainer for the tenant.

With the current oversupply situation, consider yourself lucky if you can get a tenant within 1 to 2 months of advertising.

How to Stand Out

From my observation and experience, most landlords in Malaysia put in minimal effort and money into furnishing their properties. Because from their point of view, the property is an investment, the less money they pour into it, the better.

Because of this, it usually doesn’t take much for you to one-up your competition. With a little bit of common sense and researchable taste, you can easily distinguish yourself from the pack.

Rather than being the cheapest on the block, tap into the emotions of the tenant, and you can potentially secure a rental on the higher spectrum of the market curve.

From my experience in finding a tenant family, it would be easier to capture the emotion of the woman over the man. Guy’s usually don’t care so much about interior designs.

Featured Wall: I painted a featured wall to bring out some life in a bland white living room. The total cost for me was only RM 60. The time it took me to paint alone: 2 hours.

Me painting the feature wall myself

I got my inspiration from Pinterest. Just type in ‘featured wall paint,‘ and you can visualize which color suits your property and style. Or you can visit my pinned board of wall paint color ideas here:

My saved pins on Pinterest for inspiration

Fully Equipped Kitchen: What do families who cook need? a fully equipped kitchen, duh! I got a decent sized 2 door fridge (don’t get the single door), microwave and cooking utensils.

I bet no other owners provide ovens for their tenants. So I got one (RM 399). During the viewing, sell the story that they can bake cookies or cakes over the weekend to have some quality family time. This taps into their emotions and usually gets them.

Doing all this will not guarantee you a high rental rate, but it definitely will help you to stand out and not be a commodity. Justify if you’re willing to put in the money and time. Everyone is different.

In the end, fully furnishing a 1-bedroom apartment from scratch cost me RM 10,000 in total, and that’s from being really calculative with what and where to buy my items.

How Market Price Adjust to Market Demand

supply and demand | Definition, Example, & Graph | Britannica
Image Source

As time passes, the oversupply situation realization will reach most owners. More and more owners start to lower their prices, bringing the average market rental down. After a month or two, with everyone adjusting their prices down, the average rental is now RM 1,800.

At this point, you’re probably paid the full mortgage of RM 2,000 for a minimum of two months now (that’s -RM 4,000 in total). If you can’t afford to keep going on like this, you’ll need a tenant right away. So what’d you do? You’d lower your rental, of course!

You send a quick message to your property agent to tell him or her to advertise slightly below average, let’s say at RM 1,700. Observe if your ads are getting any calls. No calls? You might want to consider lowering your prices again 🙁

After a few price experimentations, viewings, and negotiations through your agent, you secured yourself a tenant! Yay! Final rental price: RM 1,600.

But wait, is this a good idea? You’re losing money. True, but most owners have the same mentality where they’d rather cut their loses and get a tenant in ASAP to cover most of their mortgage. Then they’ll consider raising their rental as the year comes.

Alright, not the most ideal situation, you’re at a deficit each month of RM RM 1,600 – 2,000 = -RM 400.

But it gets worst. Let’s not forget all the other bills that the owner (that’s you cutie pie) has to pay:

  1. The property agent’s one month fee.
  2. The management maintenance fees (usually free for a year or two).
  3. Quit Rent (cukai pintu). 

Phew, that’s a lot of stuff, no one will ever tell you about all of these before you sign the Purchase Agreement.

Your Real Profit & Loses

Property Agent: You can save money by not using an agent. But when you advertise your property online, 1st, it costs you money, 2nd, most people that call you from your ad will be agents anyway!

Also, not everyone has the time or want to entertain viewings.

Management Maintenance Fees: These are the fees that the building management collects from all owners to pay for their salaries, maintenance of elevators, general upkeep, and security personnel.

Typically (but not always), developers pay the maintenance fees for owners for the first one or two years.

Let’s calculate your real Profit or Loss:

Monthly Yearly
Agent Fees-141-2,250
Maintenance Fees-180
Quit Rent -42-500
Rented out for1,600
Profit or Loss-763
Table of Truth

According to this table, you’re actually at a RM 763 deficit each month. In a year, that adds up to RM 9,156!

In the future, you’d need to rent out your property at RM 2,763 just to truly break even.

This will be tough (although not impossible) because RM 2,000 is already at the edge of what most Malaysians can afford to rent.

Let’s recap your loses: 2 months of full mortgage payments during setup RM 4,000 + RM 10,000 (setup costs) = You’re currently down RM 14,000.

Now, this doesn’t seem to be like such a good investment now is it?

Light at the End of the Tunnel

So what now? How can you recoup your money back? Again, I am no guru, but I can only see 2 ways:

  1. Hope that the area and property become more populated (demand > supply) so you can raise the rental price.
  2. Hope that eventually after many years, the market value of the property increases, and you’re able to sell it more than your accumulated deficit.
  3. If all fails, you can stay in your own Under-Con property while you wait for the above to happen.

Key Takeaway

There you have it. This is the real cost of buying an under-con property & renting it out in the current oversupply Malaysian market. Below is the timeline:

This is my personal experience. I bet there are people out there that are making money through property investments. But for most people starting, I think they’d be in a similar boat as me.

In my opinion, the only way you can make money with Under-Con property nowadays is to:

  1. Buy an auctioned property and pray you don’t get a damaged unit (I have no experience in auction, but will be looking into this for my next property purchase).
  2. Buy property during a recession (like right now due to the pandemic).
  3. I think in some cases, it would make more financial sense to buy Under-Con property for your own stay over investment.
  4. Invest in REIT’s instead, which is like stocks, but for properties (again, no experience, but interested).

Do share with me in the comments if you have any interesting stories of your property investment journey!

Helmi Hasan

Hi, I'm Helmi Hasan, the founder, and writer for the personal finance blog, Balkoni Hijau. Read more in the 'About Me' page or follow me on Twitter.

11 thoughts on “Why Not to ‘Invest’ in a Rental Property [Under-Con]

  1. Thanks Helmi.
    Very well written and more importantly, provides a balanced view rather than “it’s all rosy picture” for those looking for guidance in property investment. Keep it up

  2. Hey, I saw a link to this article posted by Ringgit Oh Ringgit on Facebook. I’m so glad I clicked on this!

    This was a fantastic write-up/breakdown which was really insightful, because as you’ve correctly pointed out, this sorta stuff on the “other side” is certainly not revealed when you’re speaking to property developers/agents who are just trying to get a sale! I really liked your use of diagrams, tables and photos too!

    On your final 4 points, I am a bit curious about point 2, but I say this without having done any real research as to the impact of the pandemic on both property prices and rental. My gut feel is that, whilst, yes, developers will also be looking to offload property at a lower price, the rental market will also be affected. Not forgetting that this pandemic has had market-wide implications, and I imagine if there is an impact on the property market, it should affect both the value of property, and the expected rent you should be able to command as well.

    On point 1, why do you think an auctioned property might be a better choice? Are you referring to buying from an auction where you hopefully are able to pick up a property at below market value? Would there not be a risk though that the seller’s reserve price is still too high for your liking, and this reserve price is likely to be at, or close to market value anyway?

    1. Thanks for your comment and support Wayne, I am looking into an Auctioned property for the next purchase. That being said, thorough research needed to be done to make sure that it is significantly cheaper than sub-sale. An auction property can be cheap, but it can come with its own headache. I will seek advice from friends who have done it before I venture into this. I will write about it when the time comes.

  3. Dear Helmi,

    Thank you for the well-thought given piece of writing. As I read through the post, it hits so me with so many “yeah, exactly what I thought” and “i knew it!”. Much of my assumptions were pretty much similar to your key points.

    I started working about less than 3 years ago after such a long “education“ journey and I was really excited about properties and interior decor. Since I was a child, my family always rented in a simple modest home. My late dad was never much into property, Never felt making the house pretty, homey and such. We just lived they way we could within that house. So, I wanted to make my life a different one once I have my own money.

    I visited many sub con open days, showing galleries. At one point, I almost, almost pen down a unit, like you said, a low entry, low booking fees to a 450~500k 2 bedroom apartment. But then I held back and keep going around. From all these visits, I found the same pattern from all developers. Rebates under the name of HOC, low entry booking fees, other fees waived, and also furnitures. The first one about HOC is to me, the most taken advantage leverage taken by those developers. They offset these discount buy raking up the total price of the property. At the end, yes the newly proud owner having to pay the humongous fees in interest down the line. Developers are doing what they think gives them maximum “untung” without realising how much these will affect the economy as a whole. We are screwing our young generations simply said as that.

    As for rented units, I am too looking for one as I’m planning to get married soon. Your point on owners care so little about furnishings is 100%. This is very true for newly completed units. Owners seem to have an idea that their units will get rented unfurnished~ Bare sinks, no lightings installed yet etc. No renter would go and trouble themselves to build a kitchen cabinet, install lightings, curtains, buy a fridge, washing machine. These are all basics for a living. All those basic items will cost renter easily 10k. Spread out over a year, almost 1k each month on top of the rent. Don’t forget about bed and cupboards in the bedroom. So all these, would not make sense to a renter especially if they might move out after 1-2 years of renting. Owners are just limiting their own chances in this “investment”.

    I hope Malaysians can get more exposure to real estate industry. It’s a wonderful industry to begin with, as everyone needs a home. I envy those countries like US, Europe. They have so much options and varieties. So much ideas and designs in a home. Whereas what we see in Malaysia today, 80-90% of apartment having the same layouts, same design and over estimated future value handed to these poor owners.

    We need more people like you to educate Malaysians on being real estate savvy people. Again, thank you for the writing. Cheers and have a good day.

    1. Hi Dharmiry

      congratulations on the longest comment on this blog! I’m happy that my writing resonated with you and thank you for your kind compliments 🙂 More keeping-it-real articles coming up!

  4. Hi Helmi.

    Thank you for sharing your view. I live in Seremban. I haven’t had any property yet and im thinking into buying one but looking at the price of a new developing house, I started to think it’s more worth to buy a subsale property rather than from the developer’s. In my opinion, a subsale property area is more likely developed compared to the new house area. More shops, easy access to public transportation, malls, mosque etc. Although the price range is not that different than the new developing house but it can get you save too. Let say the subsale property for a one single terrace house here is RM 220k, it can save you arounf 5k-10k from buying from the developer. But your house might not be too new la plus you need to fork out your savings into paying legal fees, stamp duty and deposit not including the renovation you might want to do.

    p/s: I love reading your thoughts and views. Thank you for sharing views from good and bad perspective in your articles!

    1. Thank you for your kind comments!

      I think we all need to trust ourselves when making a decision and not blindly follow what everyone is doing because it is the ‘norm’.

      Btw, so cheap houses in s
      Seremban! But the commute would kill me so I can’t do it

  5. I, too, was caught in the whole “first property investment” hype that encapsulated the country from 2010 to 2014. Bought my first property in 2014 while it was still in development but missed out on the LDP, which most of my other neighbors managed to get! For them, it was a win-win. They bought it a much cheaper price in 2011 and because the place was completed 5 years behind schedule, they managed to get some money from the developer. Unfortunately, I bought this during the housing bubble, so didn’t get to enjoy the payout.

    Even though my unit has managed to get tenants over the past years, it is a hassle trying to ensure your property doesn’t blow up while under your tenant’s care. And since my unit is in Cyberjaya, most of the tenants are students so the search for the next tenant is never ending. Am not even going to get into the amount of money I’ve invested in this place already….so yeah for all those millennials who’re looking for investment property, consider spending your money on other investments. The undercon property market is overhyped…perhaps I’ll also look into auctioned properties or subcon property next time as well.

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