A Complete Guide for Investing in Rental Property
Property is one of the most popular investments of the masses. Property as a physical asset is alluring not just for capital appreciation but also for rent earning capability. Read further to know what to keep in mind when buying a rental property.
Rental income is a passive income and can continue until an individual’s life expectancy and also leave a sizeable estate to the children.
Many factors influence the decision to buy a rental property – surplus income, tax benefits, rental income, the lure of a physical asset, etc. Some prefer to buy resale properties to earn rent and some prefer to buy new properties. Apart from planning the budget for the purchase and considering obvious benefits like tax savings and rental income, there are various factors to be considered before zeroing on the property.
What factors determine the Rent Earning Capacity of a property?
A property may not be able to fetch rent immediately after its ready. We need to ensure that the property is attractive to prospective tenants both in terms of reasonable rent, facilities, and comfort the house offers.
Below are some points that can be considered to ensure higher occupancy and higher rental yield:
- Location: For any rental property, the utmost important factor is its location! While a calm and serene location is usually preferred for a self-occupied property, a location closer to shopping areas, public transport hubs, schools, and colleges fetch higher rent and also, provide a better capital appreciation for a rental property. But a noisier neighborhood can reduce the demand for the property!
- Amenities: Amenities available inside the community/society such as gymnasium, supermarkets, daycare, etc. inside the apartment complex are preferred by the tenants.
- Size of the Property: A 2 BHK home has a better chance of finding tenants than a 3 BHK house. The occupancy rate of a 2 BHK house is much higher compared to a 1 BHK or a 3 BHK. Also, the property taxes will be higher for a bigger property.
- Parking Space: Parking spaces exclusively for the property should be available for tenants and visitors.
Maintenance – A ceaseless expense after buying
When a property is given on rent, any cost of repairs and subsequent maintenance on the property has to be borne by the landlord. A rental property should ideally have less cost of maintenance and repairs.
When buying a rental property, below are some points to ensure a low cost of maintenance:
- Always choose properties with simple construction. A property with typical 4-cornered construction with standard fittings is easier to get repaired than a property with a complex structure with delicate fittings.
- Ensure the property has easy access to plumbing and electrical systems for any maintenance work.
- The doors and windows and window panes should be of good quality and long-lasting. Waterproof doors can be used in shower rooms.
- Avoid fancy wall finishes and texture paints for all the walls in rental properties. Repainting these every time it is let out will cost a bomb.
- Ensure that the property is relatively safe and strong to tolerate any natural calamities like floods, earthquakes, etc.
Inflow – Rent, and Outflow – EMI
The decision to buy an investment property should be influenced not just by rental income and asset appreciation. Before you take the plunge, check the below points to ensure there are no sudden surprises to your budget and cash flow:
- If you are availing a loan to finance your purchase, check your loan eligibility and your cash flow to service the EMIs.
- The loan-to-value ratio for house purchases will usually be 80%. Ensure you have sufficient funds to pay for 20% of the value, registration, and basic interior costs for the house.
- If you are entirely dependent on the rental income to pay the EMIs, check your cash flow in case the property lies vacant for a few months.
- If you are buying a resale property, conduct due diligence on the property records and taxes due.
Hassle-free Ownership of Rental Property
Giving your property on rent not only involves the financial aspects but also other factors such as tenant behavior,
- A good Tenant is worth their weight in Gold – A tenant who maintains the property well and pays rent on time should be always sought after.
- If you don’t have time to search for tenants or any repairs and maintenance, it is best to avail of the services of Property Management Services.
- In the rental agreement with the prospective tenant, mention the duration of the agreement, clauses for terminating the contract in between the agreed duration, clauses for recovery of cost for any damages done to the property, and maintenance charges to be paid to the association.
Hope you have a wonderful Rental Property buying experience!