Real estate has always been a lucrative investment option for Indians. Many people will invest in a second and third home to earn rental income. Here is what you need to about the risks involved in renting out your property.
Low rental yield: The returns from rental housing are not very high. “In most cities, the yield is barely 2-3%,” points out Sanjay Sharma, MD, Qubrex, a Gurgaon-based real estate consultancy. On the positive side, however, rental returns are inflation-adjusted. It is usually possible to revise the rent each year, unless there is a supply glut. Hence, the return on your historical cost, improves as time goes by.
Potential expenses: All repairs have to be undertaken by the landlord. If the house needs major repair, the cost can eat away a substantial portion of the income earned that year. The house also has to be painted every time a tenant vacates.
Vacancy risk: If the house remains vacant for a few months after the previous tenant has moved out, your cash flow gets disrupted.
Tenant issues: Difficult tenants may not pay rent on time. The problem assumes a serious proportion if payments are defaulted continuously. The tenant could also misuse the property, undertaking commercial activities in a residential unit, or even use it for illegal activities. The landlord should be watchful that the tenant pays the society’s maintenance charges and the utility bills, on time.
Finding the right tenant
Research: Before speaking to potential tenants, find out the current rental rate in the area to avoid quoting a rate that is out of sync. You can charge a higher rate only if you have expanded the area of the apartment or furnished the house.
Advertise: Post a flyer on the notice board of your housing society with the resident welfare association’s (RWA) permission. You may also inform local brokers. Many potential tenants approach them when looking for an apartment in an area. Another option is to list your property online.
Police verification: Once you have found a client, you will have to get police verification done. This has become mandatory. Download the verification form from the police department’s website. Fill it and submit it at the local police station along with the tenant’s proof of identity. The police will then conduct a background check and provide approval accordingly.
Rent agreement: This document, usually prepared by the real estate agent, must mention a few things explicitly. It must specify the start and end dates of the lease and the total period. The norm in the residential market is to have a lease period of 11 months. The agreement should also mention the rights and obligations of both, the landlord and the tenant in case one of them wants to terminate the lease before 11 months. The agreement should also state the date on which the rent will be paid. If the tenant is handing over post-dated cheques, it should mention the number of cheques and the repercussions if a cheque bounces. The rent agreement should also mention clearly who will be responsible for repairs. Usually, minor repairs are taken care of by the tenant.
Register the agreement: Get the rental agreement registered. The cost of stamp duty may have to be borne by the landlord, or it could be shared with the tenant. “The rent agreement will have greater validity in a court of law if it is registered and not just notarised,” points out Sujit Kumar, a Delhi-based high court lawyer.