Costs and Considerations for Rental Property Investments in Hong Kong
Investing in a rental property is a great way for you to earn a passive income. This is one of the best examples of a passive income business. Even if you buy the house through a mortgage, you can use the rental income to pay for the monthly amortization of the loan. If you price the lease well, you can probably get some extra money to spend on lifestyle expenses.
According to an article published on CNBC.com, the residential property of Hong Kong may be high at the moment but it will go down in the next two years. In fact, prices of homes have fallen by almost 12% in the last 6 months.
This is an indication that it is a great time for preparing to invest your money in a real estate property in Hong Kong. The interest rate is expected to be low and will continue to do so – which adds to the appeal of investing in real estate.
In an article published in the South China Morning Post, it is revealed that the wealth of Hong Kong is tied to real estate and that it had always been that way. This is why you should probably start thinking about investing in a rental property in Hong Kong.
4 factors that will make or break your rental property investment
Of course, like all investments, you need to proceed with caution. Buying a rental property is no joke – it is very expensive. This is especially true with the Hong Kong housing market.
This is one of the most expensive real estate markets in the world. You have to make sure that your investment will make you earn a profit and not the other way around.
To help you make a smart decision, here are 4 important considerations before you buy a rental property:
Location.
This is probably the most important qualification. If you buy a house in a location that is near the city or a major public transportation terminal, then you are good to go. You will attract a lot of tenants and you do not have to worry about a high vacancy rate.
After all, your rental property will not earn you money if there is nobody renting it. Of course, the price within the city or the business centre may end up being very expensive. The next best thing is to look for a property that is near an MTR station.
Rental price.
The next consideration is the average rental price in the area where you want to buy. Based on the data from the Global Property Guide website, the rental yield is a little above 2%. This is why you need to make sure it will always be occupied. Now the rental price should give you an idea of the property you will buy.
For instance, a 120 sqm flat in Hong Kong Island costs HK$23 million ($3 million) while a 200 sqm will cost HK$38.7 million ($4.9 million). The former can be rented out for HK$54,200 ($7,024) a month while the latter can expect HK$84,500($10,912).
If you can afford to borrow enough to buy the bigger flat, you can expect a bigger rental yield. Of course, you have to take into consideration the possible amount that you will need to pay back your mortgage. Think about that and the average rental price to calculate if this investment will give you adequate profits.
Market.
The third consideration before you invest in a rental property is the market. This can mean two things: the housing market and the target market. Analysing the housing market will allow you to determine if you can afford to buy a house and if you can expect its value to rise over time.
If it will rise (which usually happens), you can also profit from selling the property in case you get tired of renting it out. This is a great way to secure your investment by allowing you to have a backup plan.
When it comes to the target market, you need to consider who they will be. Do you want to target single working professionals? Or do you want to target a small family? This information will tell you what type of house you need to buy and where is the best location to look for it.
The single working tenants would want to live near the business district while families would be more concerned about proximity to great schools.
The condition of the house.
Finally, the last consideration to help you make a smart decision about investing in a rental property is the condition of the house. You have to make sure that it is in good condition so you do not have to worry about maintenance costs and expensive repairs.
Since most apartments in Hong Kong are in residential buildings, you should take a look at the common areas as well. These will add value to the property and will give you more reason to charge a higher rental rate.
The cost involved in buying and managing a property for lease
Once you have considered all 4 factors, it is time for you to think about the various costs involved in managing a rental property. If you think that you only have to worry about the cost of the home loan, you are mistaken.
Let us begin with the costs you will encounter when you buy a rental property.
- Stamp Duty. This is the amount that you have to pay the Hong Kong government. It is based on the property’s selling price and market value. As of 2016, the rate is 4.25%.
- Special stamp duty, This is a payment required for properties bought after November 2010 and sold after 24 months since the acquisition. This is also based on the market value or the purchase price of the real estate property. The maximum rate is 15%.
- Agent’s fees. This refers to both broker and agent, depending on the professional service that you will get to close the deal. The rate is usually 1% of the purchase price.
- Legal fees. This is usually a fixed fee and is not reliant on the value of the property.
After acquiring the property, you will be expected to meet the following costs.
- Property tax. This is based on the value of the property. This is something that you need to pay off each year.
- Insurance fees. If this will be a source of income, you have to protect it – which gives us the importance of an insurance. In the case of fire or damages, you can make claims to protect your investment.
- Maintenance and repair costs. This will actually depend on the condition of the house. Ideally, you want to put aside 50% of the rental price for the taxes, fees, and maintenance or repair. That should be a safe estimate for your rental property.
- Profits tax. This is only applicable if you decide to sell the house after 3 years of acquiring it. But if you plan to have it rented for a long time, this should not be a cause of worry.
Investing in a rental property is a great way to diversify your income. However, you have to ensure that you have met the qualifications discussed above and that you are ready to pay the necessary costs involved in managing a rental business.
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