Real estate as an investment is always an integral part of an investor's portfolio, especially the benefits of owning rental properties are as vast as your goals and desires.
Real estate as an investment is always an integral part of an investor’s portfolio, especially the benefits of owning rental properties are as vast as your goals and desires. Real estate properties come in different forms such as residential housing, shopping centres, warehouses or storage units, office building, etc.
Apart from getting rentals you also enjoy the capital appreciation. Each property should be assessed by considering the investment amount, profile of the tenant, risk, returns, exit options, etc. Consider the following while you buy your rental income property.
Local or outstation
Buying a rental property in local, where you currently stay, allows you to be able to check on your properties easily if there is an emergency. It also makes it easier to manage or supervise property often. Contrary to the above, if you invest in properties outstation, probably your investment could return you higher returns. For instance, if you stay in Pune and plan to buy property in Mumbai.
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Cash flow or capital appreciation
Letting your property to some well-established brands as a franchise is a lucrative choice. On realising the potential of India, many international brands are trying to grow their number of outlets in India. These brands range from coffee shops, pizza outlets, etc. If you choose this route, apart from rent you may even ask for a profit share every month. Of course, different brands function differently, depending upon your negotiations with them, you can either decide on the monthly rent or earn by the profit-sharing basis.
The key to a great successful rental is one that properties a great location attracts tenants who not only pay their rent on time but also willing pay a premium for the good location. Good location is determined by various factors such as schools, colleges, hospitals, good neighbourhood, proximity to public transport facilities.
Keep a budget for maintenance
Being investors in rental properties, you must always verify your numbers, expenses are always greatly underestimated and income over estimated. Always double check every number and base your decision on conservative estimates. As with any other business or endeavour when it rains its pours. So, you must always be prepared for the unexpected. Suddenly, rentals properties might have some urgent repair and maintenance expenses. So always be prepared especially when things are going great. It will make the tough times more tolerable and less stressful.
Have clear exit plans
You should always keep ready your exit plan. Try to answer the following questions. Are you planning on keep the property for longer duration say twenty or more years? Do you want to just keep the properties till the next boom and sell; and again, buy in the recession?
To conclude, you can invest in rental properties and get good regular returns with reasonably less risk by considering the above factors.
The writer is associate professor of finance & accounting, IIM Shillong