How to decide, whether to rent out your home or sell it, in the current market conditions


To make a profit on a property investment, home owners can either rent it out or sell the property. We look at the factors to consider, to arrive at the right decision in the present market

Home owners who wish to make profits from their investment in residential property, have the option of either renting it out or selling the property. To make the right choice, one should compare the rental return and the capital appreciation to what you can earn by investing in another property.

 

Renting out versus selling: How to calculate ROI

“The main thing to identify, while selling or renting out a property, is whether the property will produce a positive cash flow. If a person is renting out a property, after deducting all the expenses which include taxes, mortgage, utility bills, miscellaneous expenses, etc., and he is still making a profit, then, it is better to rent it out. Otherwise, he should sell it,” says Farshid Cooper, managing director of Spenta Corporation.

Similarly, one needs to calculate the expected profit, before selling a property. Assuming that the home owner would lose around 10 per cent to agent fees and other sales expenses, after deducting these expenses, if the profit is not much, then, it is advisable to hold on to the property and wait for the market to improve. Maintenance charges and property tax, are the most common holding costs, for any real estate. “In case good return on investment (ROI) is not available, then, it is better to rent out the property, rather than sell it. Although the normal taxes would apply, it should help in providing good extra cash flows, even after the payment of all relevant taxes,” adds Cooper.

See also: Buy or rent: How to make the right choice?

If there is no rental income and the prospect of capital appreciation is also negative, then you should evaluate the future ROI capacity and overall, if you are dissatisfied with the growth potential, then, you should think aggressively about selling the property.

 

What should home owners do, in the current market scenario?

For home owners who would like to generate income, the prices of their houses have either gone down or are at the same rate that it was at the time of purchase a few years ago. This is due to the correction in the market by 20%-30% due to various policy changes. “Presently, my call would be to hold the inventory, as property prices are unlikely to rise for a year and a half. The best thing to do, is rent out the property and pay the taxes and maintenance bills. Ensure that you make profits from the rentals while holding the property. One needs to understand that real estate is not short-term trading. From an investment point of view, a long-term perspective is best, with a time frame of at least 10 years in mind,” suggests Amit Wadhwani, director of Sai Estate Consultants.

 

Case study

Suppose a person owns a property with a market value of Rs 80 lakhs in Thane, Mumbai. The rental that he can earn from this property is Rs 3 lakhs per annum. Should the owner to sell the property or rent it out?

Expert opinion by Farshid Cooper, managing director of Spenta Corporation: A rental of Rs 3 lakhs per annum, on a property value of Rs 80 lakhs, is very good in terms of yield, if we are talking about a residential property. The person should hold on to the property in such case, as it would also yield capital gains over a period of time. If this is a commercial property, one should look at making an exit, as commercial rental yields are comparatively higher in the market. Presently, the rental yield for residential properties is in the range of 2-3% and 7-10% in the case of commercial properties. Although these figures might vary a bit, depending on valuation and location, this is a general thumb rule, which an investor/property holder can follow.

 

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