Let's Dive DEEPER...

Many landlords are overly concerned about achieving a rent to fully cover monthly instalments. When the following article surfaced, existing landlords agree with what the article says, and potential landlords expressed their concerns to me. Some even said they would wait it out before investing in a property, so that they could avoid getting stuck in this situation.

​

They were convinced that they would be making a loss if they were to

rent out at a rate lower than their mortgage installments. 

To make it clear, the installment comprises of principal and bank interest. The principal pays towards the property, which means that you are paying off your house over time. When you sell the house, the whole principal amount goes back into your pockets.

On the other hand, the interest is paid to the bank, which is regarded as an expense. 

On top of the bank interest, other monthly expenses when owning a property include the maintenance fees and prorated property tax.

Expenses do not pay down on the property, and cannot be recovered from the sale of the property.

​

Therefore, do you know that

As long as your rental income covers/exceeds all monthly expenses,

you are not losing money?

​

In actual fact, any rent excess of the installment is a profit to you, because it helps to pay towards the principal.

In other words, your tenant is helping to pay off your house!

Even in a slowing rental market where you would need to top up the principal payment from your own pocket, it is a form of a forced saving. Think of it as making deposits into a bank account that you can withdraw from in future.

​

Let's look into a real life scenario that I have encountered. An offer of $4,500 was received, $300 short of the landlord's ideal price. The landlord decided to forgo it and wait it out. At that point in time, there was a good supply of available units in the market, so tenants had many choices and therefore, had more bargaining power.

Under such conditions, other landlords who feel the strain of paying the full mortgage from their pockets would accept $4,500, which lowers the benchmark price.

When faced with such a situation, the landlord could choose to continue to wait for his ideal price. But in reality, for every month that he spends waiting, he would lose out on $4,500 in rent that could have been collected if he had secured that tenant much earlier on.

Eventually, landlords would realise that more transactions are hovering around $4,500, or even lower, when more and more landlords are urgently securing tenants. This makes waiting futile, and months of actual rent would have been lost. 

​

Landlords may be facing a tougher time amidst the supply glut. Yet, the real estate market is a cycle, and for every bottom there will be a peak. As long as landlords are clear of the concept detailed above, they can still benefit greatly by having their unit rented out quickly.

Have a peace of mind with your property investment!