Not everyone buys a house or an apartment to stay in- real estate is a certain way of ensuring income in the long run with rentals. It is a very lucrative investment option because capital appreciation in real estate is bound to take place over the years. It is the sector with highest ROI and will be a way of ensuring income even during your retirement and in a most regular manner. The property rents also tend to climb during inflation and so that aspect is also taken care of. Hence, if you are looking for a property for investment purposes only, here are some things you can keep in mind which will help maximize your returns.
It is first important to come to terms with one’s own expectations and figure out how much rental income you would want each month. This amount will vary on a number of factors like the city you stay in, the overall rental rate of the locality, and whether you are investing in commercial or residential property. While commercial properties will help you with higher rental returns, there are no tax benefits to be availed from it so choose accordingly.
Important factors for good rental income
Ideally, the property should generate at least 3% of its current value in a year- so if a property is worth 1 crore, it should ideally yield Rs 25,000 each month, to come to the desired amount of Rs 3 lakhs per year.
Next, it is also important to remember that the entire returns from the rent will not be counted as income alone because you would have to put some money back in the property for its maintenance at regular intervals. Depending on the size of the property, the upkeep of the premises, the quality of construction and the functioning of the amenities, one could have to shell out at least 10% of the rental income. Likewise, a well maintained property will be able to generate higher income and will also stay occupied for longer.
It is also important to be realistic in some cases. If your property remains occupied throughout the year – well and good. However, it is ideal to calculate your finances with the notion that the property will be occupied for 10 months a year only, and if the property remains vacant for two months, the rental income will come down by that much amount. So, it is a good idea to look for a new tenant before your former tenant vacates the premises.
What should you keep in mind?
Apart from the money that you would invest in the maintenance of the property, another major source of expenditure, at least initially, would be the EMIs that you would have to pay on that property. So try to find a lender who charges a lower rate of interest, and zero to low processing fees. By no means should your EMIs be higher than the average rent you get out of the property or else it will end up becoming a liability. It is also important to cover all your own liabilities beforehand and approach the lender with a good credit score so that you can convince the lender to charge lower interest for you. This will also help maximize your rental returns.
It is also important to choose the location of your second, investment property with care. While you might choose to stay in a quiet location yourself, try to buy your second property meant for rental income in a location which is well connected and bustling with activity. If it is located near an employment hub, then better. It should also have good connectivity and markets, hospitals, pharmacies, schools and banks, along with entertainment and dining complexes, should also be located close by as much as possible. Yes, acquiring such a property in the first place would require a hefty investment, but such a property will generate far greater rental returns in the long run, and the capital appreciation here would be higher than other parts of the city. Ideally, buy a property in a location where the infrastructure is still developing if you want to keep the prices low and by the time the tenant arrives, the amenities would be in place and you will start receiving the returns you expected.
In case of investing in a commercial property, look for areas where there are wide roads, good traffic, metro facilities, ample parking space and other business establishments. In the long run, it is a far better idea to invest in a property that is high priced and has greater ROI potential than buying a low priced property and see it lie vacant for the better part of the year. If you do not have sufficient funds to invest in such a property now, then it is a good idea to wait for it for a few years, and then invest to acquire such a high yield property
