45-year-old banker and a resident of Kolkata, Tuhin and his wife, Nira were planning to move closer to their daughter who lived in Hyderabad. But they didn’t want to sell off their 2 BHK apartment in Southern Avenue. The next best thing was to put it out on rent.
Tuhin is not alone; a property in India has always been considered valuable, whether as ownership pride or as a source of income for the future. The demand for housing is likely to maintain an upward trend due to several factors such as population increase, urban migration, etc. and in this scenario income generation through owned properties is quite lucrative. Renting out an apartment is also a good way to make money during post-retirement years.
The rental yield or the annual rate of return on a property when it is rented stands at an average of 3% for the year 2018, according to various studies on rental yield from residential properties. However, this figure can see an increase of 6% during favourable real estate prices and also vary from city to city. Besides, the best part about renting out an apartment is that it can earn an inflation-adjusted income. The rents can be revised each year to mirror the inflation in the market and thus, returns can be improved per annum.
Renting out an apartment has its own sets of advantages and disadvantages, therefore, certain key factors need to be considered carefully before you decide to become a landlord.
Potential Risks and Expenses
The underlying issue of a stagnant or low yield from rents is always looming over the prospect of renting out an apartment. To ensure a steady rental yield it is imperative to improve the liveable condition of the apartment. Therefore, expenses towards basic furnishings such as fresh paint, bathroom and electrical fittings, storage, woodwork, etc. need to be incurred. This is again a recurring expenditure towards periodic maintenance and during a change of tenants. Once in a while, major repairs due to climatic or other factors can also spell heavy expenses on the owner’s part.
Type of Tenants
There are can be broadly three types of tenants. Family, where the rent income stays low, though stable, and includes minimum maintenance expenses and risks. Second, bachelors tend to bring in a higher rent yet the regularity of payment, property safety, expenses and risk of frequent changes in tenancy are prohibitive factors. Finally, renting out as a service apartment is an increasingly popular option with professionals and married couples, especially in metro cities. These fully furnished and full-service apartments are supplied with furniture, fittings, and facilities, and they also fetch a higher rental yield.
Preparation for Renting out an Apartment
It is vital to research the trends in rents around the locality of your property. This should give an idea about the right amount to be charged. Also, consider adding value-added services like extra car parking, or minor modifications based on tenant requirements. This can also reflect in rent amount ranges where unfurnished and semi-furnished apartment options can be priced separately thus increasing the probability of finding tenants with desired rents.
Be flexible towards rent and deposit amounts and durations. Many tenants are unable to afford high deposits at a time, coupled with brokerage charges and shifting costs. Owners who have a flexible approach tend to attract tenants for longer periods.
While advertising your apartment take advantage of both offline and online channels. The latter has gone a long way in curbing the brokerage influence and costs, furthermore, online visual checks minimize physical visits and decision-making times.
Complete paperwork and legal documentation is an absolute necessity when embarking on renting out an apartment. To begin with, police verification and background checking of tenants is necessary. Owners can also ask for reference letters from tenants’ place of employment.
Enter into a rent agreement that mentions important details such as start and end dates of the lease period, rent amount, date of monthly payments, rights and obligations of both parties, conditions of termination, eviction terms, and other such factors. A rent agreement provides clarity and legitimacy to renting terms.
Registered rental agreements carry greater validity than notarized ones and are gradually becoming the norm. Besides, registered rent agreements can also be drawn for a longer period of time than the usual industry standard of 11 months. This is mutually beneficial for the owners as well as tenants and provides a much-needed respite from yearly renewals.
Besides ensuring that all paperwork is in order, it is advisable to maintain amicable relations with the tenant, while also keeping an eye on how and what for your rented premises are being used.
If you rent out your apartment with these factors in mind, you will certainly find your real estate investment yielding positive returns, and in a good way.