What are Bread & Butter Properties?

Generally, Bread and Butter Properties (B&B) are homes that appeal to the masses: the vast majority of people in our society live in these houses, flats or apartments.

In Malaysia, low cost and medium costs properties would fall under this category of B&B. Properties which are priced in the range of RM25,000 to RM42,000 are considered low cost properties, and the government mandates that 30% of housing development by private sector to be reserved for this category. The properties are normally 5 storey walk-up flats that measure around 650 to 700 sq ft. The Real Estate and Housing Developers Association (REHDA) says that these low cost housing are usually reserved for those with household income of less than RM2500 per month.

Low costs properties are normally leasehold and State/DBKL approval is needed by the owner to transfer the title.

On the other hand, medium costs properties are normally priced from around RM72, 000 and up to RM100, 000. These are normally not subjected to the same restrictions as low costs housing.

What should be noted though is that, although the purchase prices of the low cost property is lower than RM42,000, the price in the secondary market could be much higher. Some low costs flats measuring 650 sq ft (2 rooms 1 bathroom or 2R1B) have been transacted at prices as high as RM70-80,000 in desirable areas. While those with 3 rooms, 2 bathrooms (3R1B), measuring 750 sq ft have transacted at above RM100,000 depending on location, and also condition of the flats.

In actual fact, there is no real hard and fast rule on what constitutes a B&B property: suffice to say that these appeal to the mass majority of people. If you really want to know where to find them, a good place to start would be to just ask around your office: colleagues or people in your work place, where they live? Talk to those who are young executives, or newly married couples, especially those from out-of-town. You would find that most renters live in areas like Cheras, Setapak or Desa Tun Razak and are renting houses or flats that are priced between RM500 to RM800 per month.

Why buy B&B properties for rental?

One of the key criteria of creating passive income from rental properties is that you must be able to rent it out easily. If you have difficulties renting it out, then you will find that it doesn't work so well. A high vacancy rate just means lower yields. Therefore, it's important that there are plenty of renters in the area you choose (i.e. there's high demand for your flat or house). And, they are willing to pay top dollar for living there because of desirable factors like easy transport and others (we will discuss this later on).

Generally, I focus on flats that can rent out for RM500-600 per month (2R1B) or RM700-800 per month (3R2B) (gross). These are the prices that most working people or you small families can afford. As most spend around 25-30% of their income on rent, this would be the range that makes sense. The average income per capita in Malaysia (2008) was US$6970 or RM24,000 per year. That's roughly RM2,000 per month hence, the average Malaysian can afford to spend up to RM600 per month for rent (or up to RM800 per month for a small family).

Segment *	Rent	Value of property
High end (30%)	Above 1,000 p.m.	Above RM150,000
B&B mid (40%)	Between 500 – 800 p.m	Below RM100,000
Low end (30%)	Below RM400 p.m	Below 42,000

*Note that this is how I segment the market for rental properties and is not based on any in-depth research.

Focus on the mid segment (40%) bread and butter properties for reasons explained. At best stay away from the low end segment as they are normally in less desirable areas where the government has put up public housing. And most importantly, a reason to avoid this segment if you planning to generate passive income is that it may be difficult to collect rent from the renters (high possibility of default).

The high-end segment can also be tricky as the renters can have many choices to choose from if they can afford to rent, for example, young executives. Further as they progress in their career, and make more money, most would be encouraged to buy their own property to live in – hence, they move out of renting your unit! The very high end properties (e.g. Bangsar, KLCC or Mt Kiara condos) which tend to attract the expatriate community who are prepared to pay RM5000-10,000 per month rental are subject to fluctuations in market conditions. In good times, it may be easier to rent them out but when crisis hits such as in 1998, or 2008, a lot of the units stay empty as the expats are sent home. So, for this segment of investing for rental it may not be the most appropriate strategy – most who buy, choose to live in it or as an investment (capital gain) or both.

So, stick to the mid segment which can provide more than enough opportunities for you to generate passive income through renting.

**