Saturday, September 17, 2011

What you should know before renting your house - Economic Times

What you should know before renting your house - Economic Times:

What you should know before renting your house

Amit Shanbaug, ET Bureau Sep 12, 2011, 03.29am IST

The two-bedroom flat in the multi-storeyed complex at Vasundhara Enclave near the Delhi-Noida border is in a mess. The flooring has cracked, the pipes are leaking and the woodwork is in a bad shape. Still, Noida-based businessman Sudhir Makhija is interested in buying it. It's because he wants to invest in property for rental income.
The extension of the Delhi Metro link to Noida two years ago has pushed up rents in the area, and Makhija estimates he will have to spend another Rs 2 lakh to do up the house before he can find a tenant. "The high rental value of the locality will more than make up for the expense," he chuckles.
Buying property for rental income may seem out of place at a time when real estate prices are at high levels. Yet, there are many buyers like Makhija whose sole intention is to put up the property on rent. In fact, according to an online survey conducted by ET Wealth, the age of such investors is coming down, with almost 90% of the respondents being less than 45 years of age.
For them, there are still some islands of high rental yields across India ( see Lucrative cities ). Rental yield is the annual rent earned by a property as a percentage of its price. For instance, the rental yield of Vasundhara Enclave is 2.73%. This means Makhija, who has rented out five other properties in and around Delhi, can expect an annual return of 2.73% on his investment from the rent alone.
Lucrative cities
This unabashed focus on rent has many positives. For one, inflation is rent-friendly. Rents go up with inflation, while the home loan EMI for the property remains more or less steady. The rise in rent increases the cash flow without any hike in the expense for holding the property. When inflation is spiralling, it can also mean more tenants because high prices bring down the affordability of homes. Of course, while the property earns a regular income for the owner, it continues to appreciate in value.
However, renting out property may not be everyone's cup of tea. "My business gives me the flexibility to manage my five properties. Someone with a full-time job will find this difficult to handle," says Makhija. Dealing with tenants can also be a nightmare. Besides the usual shenanigans over delay in rent, there is the fear of a tenant not vacating the property.

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