Looking to let your property for earning rental income? There are quite a few things that you should not miss in this regard! Here’s taking a closer look at the same.
For many individuals, a property for investment purposes is high on the bucket list, especially if they wish to earn steady rental income from the same. In volatile times, this is often seen as the best alternative by many people. Investing in property means you can earn rental income while also gaining eventually from appreciation in capital values. However, it is not easy to earn proper rental income and safeguard your property simultaneously. Some of the basic risks include finding a proper property tenant, non-payment of rental and maintenance costs or delays in payment of the same, refusal to leave the premises upon expiry of the agreement and more.
At the same time, there are no guaranteed returns from your investments, and you should not make the mistake of depending excessively on rental yields for offsetting your monthly EMIs. This is because your property may remain idle at some stretches until you find tenants or until they move in. The average rental yields range between 2-4% these days while your rent will also be taxable. At the same time, there is no limit on applying for exemption on interest paid on your home loan if you are letting out the property, under Section 24. This is one benefit that you should always keep in mind.
Some Aspects Worth Keeping in Mind
- Letting out or renting your property is a full-time affair, needing both proper management and time on your part.
- It is easier to rent out an apartment if you stay close to the same though you may need to hire property managers for properties located in other cities or districts. This individual will help you with getting new tenants, collecting rentals, covering repairs and also tackling other emergencies. Yet, hiring a property manager will lead to higher costs since they usually charge either half or one month’s rental amount from both the parties.
- Once you have met with a tenant and decided to rent your property to him or her, make sure that you get police verification done swiftly. This is compulsory as per Section 188 of the Indian Penal Code.
- After police verification, the legal document that will be the mainstay of your engagement is the rent or lease agreement. The scope will be offering the right to reside in a property for a particular duration based on the price that is paid for the same. This document is the legal guideline for solving any disputes. An 11-month agreement (renewable) is common in most cases.
- Many people also go for company leases for three years when they are renting out to people employed by particular companies or organisations. This is safer than personal leases since the corporate will have full responsibility for the tenant in the three year period.
- You should compulsorily get your rent/lease agreement registered as per the Registration Act of 1908 Section 17 if the period surpasses 11 months.
- The lease agreement should clearly offer coverage for the tenancy period, rental amount per month, maintenance costs, security deposit, termination rights, and escalation costs and so on.
- The rent agreement should also mention who will be paying for electricity, maintenance, property taxes and water costs. Service tax on rent was implemented in 2007 and there was some confusion relating to service tax applicability on the rental amount. Service tax is presently non-applicable on rentals for residential units. At the same time, in case of an unfurnished apartment, the agreement should have a list of suitable fixtures and fittings along with penalties payable for any damages.
- Many RWAs also come into the picture for residential societies. In these cases, tripartite agreements are signed between landlords, tenants and RWAs. They also have legal powers to seek these agreements on the basis of bylaws.
- Upon leasing out the property, make sure you visit periodically to assess its condition. If you feel that it is not being maintained suitably, you may ask tenants to vacate by giving advance notice. For outstanding amounts or damages, you can deduct money from your security deposit. For tenants refusing to vacate their apartments, owners may take the RWA’s help while filing police complaints too.
Phew! There are a lot of things that you need to account for, while renting or leasing out your property!
What Else Should You Know?
- The agreement should mention a fixed rental amount with the provisions for escalation (mention the percentage) in the future. Before fixing your rental amount, do market research and find out the average amounts charged for similar properties by other tenants in your area. Do not unnecessarily peg you rental amount higher than the market value. You can charge higher amounts only if you are adding special amenities, furnishings and premium services to the property.
- Marketing your property is also important. You can start with online listings and reaching out to brokers who have a good network of tenants in the area. You should click pictures neatly of your rental unit along with listing out the amount, security deposit, location details and amenities clearly and in a transparent manner.
- A broker is sometimes a godsend. These professionals often help in quickly finding tenants while also offering services like agreement creation and other paperwork along with verification of tenants too. You will essentially pay a little more for saving on time and energy.
- List out all furnishings and fixtures along with other amenities. This will come in useful if any future damages happen. You can then impose a penalty or cost of repair. Check the roof and wall condition carefully before renting out your property and document the same in order to avoid future disputes.
- Take at least two months’ rental as your security deposit or advance. Work out the increase percentage every year.
- Many tenants often end up using residential rented properties for commercial activities. Make sure that no such activity is allowed, by mentioning it clearly in the rent agreement and periodically visiting the property.
- Patience is the key towards stabilizing your monthly inflows. Rentals may initially seem lower although your overall return will improve with the passage of time.
- Account for the prospective expenditure that you will have to cover including maintenance, painting the house and so on. Have a contingency in place for a scenario where the property remains empty for some months.
- Be prepared to tackle issues of tenants in some cases. Make sure that tenants pay maintenance charges of societies in a timely manner.
- A thumb rule is to lease out to tenants who can furnish proper 3-6 months’ bank statements, pay slips or proof of income, credit history and employment references. You may ask for references of earlier landlords as well.
- Always have everything in writing, right from the agreement to other modifications and so on. Even when you take up repair and maintenance jobs, get the tenant’s confirmation or acceptance in writing.
- Have a fair procedure of collecting, holding or returning the security deposit amount. Inspect and note the property condition before any tenant moves in, for bypassing disputes in the future. Have the tenant present at these inspections.
- Keep maintenance and repair work up to date and make sure that you are carrying out all your responsibilities as mentioned in the rental agreement.
- Ensure proper security for your property with good lighting and other security features.
- Always give notice to your tenant before entering your property.
- Reveal environmental aspects like mold or damp to the tenant beforehand in order to prevent disputes over future health issues.
- Always conduct a background check of your broker or rental agent before you assign the tenant-finding job to him or her likewise.
- You should have proper property and liability insurance, safeguarding yourself from losses on account of damages, vandalism, burglary, fire, natural calamities and more.
- Always take a pragmatic approach towards resolving disputes with tenants, instead of always involving lawyers and going ahead with legal cases. If there is anything that does not have to do with eviction, meet your tenant and try to resolve issues in an informal manner. If this does not work out, you can either get a mediator or lodge a complaint with the Rental Housing Tribunal.
