When people invest in real estate, they look for capital appreciation of the property along with the rental income to get the return on their investment.
It’s not that everyone who invests in a house does so only to stay in it. There are many who buy a property with an investment objective. When people invest in real estate, they look for capital appreciation of the property along with the rental income to get the return on their investment.
It’s a fact that attractive rental income can help you earn a high real rate of return in the long-term. Rental income also gives you the benefit of a regular income, which keeps increasing every year to remain in sync with inflation.
So, if you too want to invest in a property to earn a high rental income, you’ll be well-advised to keep the following things in mind:
Figure out how much rental income to expect
Before you invest in a property, it’s crucial to figure out how much rental income you should expect. The rental return may vary depending on the city, location, population, etc. Also, the rental income on residential and commercial property differs significantly. Usually, returns as a rental income on commercial properties is higher than residential properties. However, you don’t get a tax benefit and easier loan support when buying a commercial property.
It’s always tricky to select between the commercial and residential property; so, evaluate both the options carefully before taking the final call.
Also, according to a popular rule of thumb, it’s said that your property should ideally generate at least 3% of its current value in a year. That means, if the current value of your property is Rs 1 crore, it should earn at least Rs 3 lakh in a year (i.e., Rs 25,000 in a month).
Factor in the maintenance cost of the property
Remember, the entire rent you earn from your property investment is not your income alone. You will have to shell out money for the maintenance of the property at regular intervals too. Depending on the age of the property, its size and quality of construction, and also the amenities that come with it, you may need to spend around 10% of your rental income for the maintenance costs. That being said, if your property is well-maintained, there is a higher chance that it will stay occupied and generate income for a long time.
Consider occupancy rate
It’s not necessary that you’ll get continuous occupancy throughout the year. It may happen that your property remains occupied for an average 10 months per annum; therefore if your property is vacant for two months every year, your rental return will come down to that extent. You need to actively search for a tenant before the existing occupant leaves the property.
Evaluate interest rate on the loan
While investing in a property for rental income, select a lender which offers you a lower rate of interest and processing fees. Usually, the rate of interest levied on a residential property is higher than a commercial property, therefore, if you are not able to find an occupant for a long time, it may cost you heavily. As such, it makes a lot of sense to take appropriate steps to improve your credit score before applying for a home loan to ensure you get the financing facility with better repayment terms.
Wisely choose property location
The choice of property location plays a very important role to ensure a smooth inflow of rental income. If you are purchasing a residential property, it should have easy access to roads, metro stations, and railway stations along with other physical infrastructures.
Usually, people who find a rental home, also look for social infrastructures in the vicinity like schools, colleges, malls, supermarkets, multiplexes, hospitals, clubs, hotels, parks, and so on. Equally important is that fact that your property is near to office areas and technology parks.
On the other hand, if you are planning to invest in a commercial property, you should look for aspects like low traffic in the area, wide roads, access to metro, sufficient parking space, various business establishments in the area, adequate security and excellent connectivity to key locations in the city.
It’s better to invest in a property with a high price and high return-generating potential than investing in a property with low price and no ROI potential. So, if you don’t have sufficient income to repay the loan EMI, wait for few more years to build up capacity, but don’t rush to invest in a property which has low or no return potential.
(The writer is CEO, Bankbazaar.com)