For many, buying residential property to let is an attractive income investment in a time of a volatile stock market and low return in other popular alternative investments such as gold and mutual funds as property can fetch rental income and has an upside potential for capital appreciation in the long term. While it look appealing to fetch monthly rental income, it is not easy to earn good rent and safeguard the interest in property. Few of the common risk in renting a property include, finding a good tenant, maintenance of the property, delay or non-payment of agreed rental charge and maintenance charges, refusal to vacate the premises by tenant etc. Moreover, like any other investment, the property investment comes with no guaranteed returns. Most investors make the mistake of relying huge on rental yield when buying property for investment purposes. If you are taking out a mortgage to buy a property for investment, never rely heavily on rental income as the property may sit empty for a month or two. Beside this, the average rental yield ranges only between 2 to 4%. This yield further shrink as the rent earned is treated as income and taxed as per the personal income tax slab.
Renting a property is a full time task which requires both time and management. Generally it is easy to rent a flat if you are living near to the property but if the property is located in other cities you may need to hire a property manager who can help you to fill vacancies, collect rent, make repairs and handle emergencies. However, hiring a property manager increases costs as they typically charge half- or one-month rent from both the parties.
If you are planning to let the property, you should always keep few things in mind to earn good rent and safeguard your interest in property. Once you decided to let the property to a tenant, the first and foremost thing is to get done the police verification of your tenant. As per section 188 of the Indian Penal Code, police verification of tenant is compulsory.
Post police verification, the legal document that binds the landlord and tenant in a mutually agreed terms and condition is lease agreement or rent agreement. The scope of a Lease Agreement includes a right to enjoy such property for a certain period in consideration of the price paid or promised. In case of any dispute this document can be served as legal document. As a common practice in residential property lease transactions, eleven month agreement is signed between tenant and owner.
However, some people prefer company lease which is generally a 3 year agreement with the company. Company lease is generally considered safer than the personal lease as in case of company lease, the corporate assumes the responsibilities for the occupant. However, as per section 17, of the Registration Act 1908 it is mandatory to get rent agreement registered and pay prescribed stamp duty and registration fee if the lease period is more than 11 months.
Few key transaction aspects that should be covered in rent agreement include:
- Rent per month,
- Period of tenancy,
- Termination right,
- Security deposit,
- Maintenance charges,
- Escalation charges etc.
The rent agreement should clearly define who will pay for maintenance, electricity, water charges, property tax etc. Just to clarify, service tax on rent came into the effect in 2007 and there was much confusion regarding applicability of service tax on rent. Currently, service tax is not applicable on renting of residential dwelling units for use as residence. Moreover, if the flat is furnished the agreement should have a list of fittings and fixtures and penalty for any damage.
Beside rent agreement, now some RWAs (Resident Welfare Associations) also signed a tripartite agreement between tenant, landlord and the RWA. The RWA is legally empowered to ask for such agreement based on their bylaws.
Once the property is leased it is good to visit the property time to time to know the condition of property. If owner feels that the property is not maintained he can always ask the tenant to vacate the house by providing prior notice as mentioned in the contract. For any damage or outstanding money the owner can deduct the stipulated amount from the deposit. If the tenant refuses to vacate the flat, the owner can contact RWA and can file a police complaint as well.
The bottom line is that you should make sure that you understand what you're getting into. After doing the financial planning considering all the additional expenses and all of the related challenges if you are meeting your objectives, renting really make sense as it keep property maintained and add few extra bucks to your income.
About the author
Surabhi Arora, leads the research team in India and has more than13 years of experience in carrying out multi-disciplinary research and analysis in the area of finance and real estate industry. Surabhi specialises in real estate economics, policies, commercial and residential real estate research with in-depth knowledge of market dynamics across major markets in India.