What to Consider When Buying a Property for Rental Income?

For Kishore Dalmia, real estate investment has been a stable side gig ever since he was 37. Now at 58, two years away from his retirement, Mr. Dalmia is a proud owner of three properties in a posh Mumbai suburban area.

Though the new generation considers investing in stocks and mutual funds to build their retirement corpus, traditional property investment has proven to be a great source of long-term passive rental income for a very long time. For one, rental properties bring about a significant amount of cash flow. And as opposed to stocks, there is hardly any chance of the principal investment getting wiped out.

So what does it take to be a landlord? Well, it does take some money to start, but if you have a steady job, have a home to live in, and if you are willing to make some sacrifices, being a landlord is not as much a pain as many might think.

Rental income from properties provide you with an inflation-protected passive income as long as you live, and the best part is — you can monetize the asset in case you need money without selling it. However, there are factors you must keep in mind before buying a property for rental income. Let’s discuss some of them.

Location

The characteristics of a location influence two crucial aspects – 1) The tenants you attract 2) The vacancy rate.

For instance, if you buy a property near a university, chances are your tenants will be mainly students, which means your property will remain vacant for 3-4 months a year during vacations. On the contrary, if you buy a property in a business district, your property is more likely to be occupied all year round, unless the tenant gets transferred somewhere else.

Location is an important factor to consider, but a lot depends on your budget as well. Begin by doing an extensive research to locate the best neighbourhood within your budget range.

The Brick and Mortar Property

Usually, the best real estate investment for beginners is a 2 BHK flats. Flats or apartments are low on maintenance because in most cases, the homeowners’ association takes care of major maintenance and repair activities. Since the cost of maintenance gets divided by the total number of homeowners, you won’t feel the pinch. A 2 BHK flat is a perfect investment to start with, as it tends to attract more tenants, especially families.

Taxes

If you own more than one house, only one is considered as self-occupied. A self-occupied house property means: it is occupied by the owner for the purpose his own residence; it was not actually let out in the previous year and that the owner does not derive any other benefit from the house.

You can decide which house will be your self-occupied property. It does not have to be the first one you buy. Suppose you buy another house and do not let it out, it is still considered as rented out by default. Income from rent is taxable. If you haven’t rented out your additional property, the fair market value will be considered as rent.

A second house is considered for the imposition of wealth tax, which means that if your net worth of wealth exceeds Rs 30 lakh on the valuation date, a 1% tax will be applicable on it.

The maximum deduction on interest on the home loan is now capped at Rs 2 lakh, against the entire interest that was Rs 1.5 lakh earlier, even though there is a provision to carry forward the losses in eight consecutive financial years.

Therefore, in case of property bought on loan, both the interest and rental income is taxable subject to the conditions stated above.

Public Utilities

Go on a fact-finding expedition to scan the present and proposed public utility facilities in the neighbourhood, such as educational institutions, public transport hubs, malls, gyms, parks, movie theatres, and other amenities that attract tenants. These factors influence the rental value greatly, particularly, if you are dealing in 2 or 3 BHK family-sized accommodations.

Future Projects

New developments are an indicator of the growth potential of a particular region. If business parks, apartment buildings, commercial complexes, and metros are coming up in an area, it can be assumed as a good investment zone. Municipality websites are great resources that provide authentic information about upcoming developments in a district.

Average Rent

Since rental income is what you are looking for, it is important to find out the average ongoing rents in the area of your interest. Investing in an area where the average rent won’t cover your EMI, taxes, and other expenses doesn’t make sense. If EMIs and taxes are more than the rent, it might eventually drive you towards bankruptcy. Unearthing the rental income potential is crucial, as it would decide the potential of profit or loss on your investment.

The Thumb Rule

To be on the safe side, do not invest in a property where you are not expecting capital appreciation. You must invest in a property where you can foresee substantial capital appreciation as well as rental income.  Also, do not get carried away by optimistic assumptions. Be realistic, and be mindful while evaluating your financial position. Make sure you are financially healthy to pay EMIs during the vacancy phases.

Remember, even if you’re buying a property solely for the purpose of renting, it still pays to put yourself in the tenant’s shoes. A property may look good but may not be a great option for prospective tenants. Ultimately, buying a property for rental income is never too easy. But keeping these factors in mind before starting out will help you take the right decision.