Thinking about investing in a rental property? Buying a rental property can be a great real estate investment strategy. But like any investment, you need to understand what you are getting into before you buy and a clear strategy to generate income. Evaluating the potential income, expenses and returns on investment can help you determine its profitability.
A rental property is a residential or commercial space that is rented out to a tenant for a fixed period of time. The goal is to create a positive cash flow – earning a residual income every month over expenses.
There are two ways a rental property generates returns – rental yield and capital appreciation on exit. The rental yield is a term used to describe the rental income generated from the property. If you have invested Rs.15 lakh to acquire a property and the monthly rental income is Rs.10,000, the rental yield is 8%.
Capital appreciation is a rise in the value of the property over time. This is dependent on the market dynamics – the demand of the buyers in the area and supply of the houses available. If you buy a property at 15 Lakhs and sell it at 20L, you can say that the investment have appreciated by 5L. However, you need to pay capital gain tax on this profit.
There are a couple of aspects to consider to help you buy the right property:
- Property Type
First, you need to decide the type of property to invest in. No matter which property type you choose, it’s essential to know which type is in demand in the specific area.
Residential properties are probably the most popular type of real estate investment. These include houses, apartments, villas, and vacation rentals – basically any type of accommodation designed for people to live in. The average rental yield for a traditional residential property in India is 3%.
There are two ways you can rent out a residential space:
- Long- term rental
- Short term rentals
You can assess which one is ideal here.
Commercial properties include office buildings, retail outlets, hotels.
The location of your property is the most important factor to consider. You need to look for neighbourhoods while considering the following:
- Supply and demand in the area
- Average property value
- Average rent
- Vacancy rates
- Economic growth
- Property Features
Depending on your target market, you need to invest in feature in demand.
- Number of bedrooms
- Square footage
- Parking space
Suppose you are investing in residential property in a neighborhood with a lot of offices and your target audience is young professionals, you are better off with a single or two-bedroom home rather than a three or four-bedroom home which is rented by families.
- Analyze the financials
When analyzing a rental property, cash flow is the most important metric. To do this, first determine how much income your property generates. If your property is occupied, confirm your tenant is paying market rental rates. To determine market rent, compare similar properties and vacancy rates in the area.
Important metrics for analysis
- Cash-on-cash returns
- Capitalization rate
- Finding a tenant
The first order of business after acquiring the property is finding a tenant. You can advertise on online websites like housing.com, square yards, 99acres. You can hire a real estate agent to handles
If you wind up renting your property to the wrong person, you could end up with a major headache. The success of your rental depends on the quality of the tenant that lives there. You should screen every tenant that you’re considering.
Investing in rental property can be a lucrative way to build wealth. However, you should do your due diligence before buying one.