Real estate is considered one of the safest investment options. A key reason why people prefer to invest in property is the ample opportunities it provides for earning passive income. Many people purchase property for stable cash flow through rentals and avail of tax benefits to maximise their savings. The additional earnings from a property help one meet one’s financial needs, such as making home improvements, paying debts, and planning one’s next investment. In recent years, the Indian real estate market has seen an upward trend, attracting many first-time buyers and seasoned investors. Owing to the limited land availability and growing demand for real estate, property prices are expected to see a steady rise.
Proper market research, money management skills, and a sound understanding of the legal aspects are some key things necessary for an individual or company planning to raise money from real estate. In this guide, we discuss how one can generate income from an existing real estate investment.
#1. Long-term rentals by renting entire out the property
Investing in a property to earn long-term rentals is an excellent way to generate a steady income. When a property is leased out for more than six months, it is referred to as a long-term rental. Typically, rent agreements for residential properties in India are signed for an 11-month tenure and are renewed based on landlord-tenant mutual agreement. This helps generate a steady income for landlords.
To generate a steady rental income for the long term, it is crucial to invest in the right location. An area close to a bustling commercial hub or upcoming infrastructure projects promises good returns in terms of increased property value and higher rentals.
#2. Short-term rentals through Airbnb and vacation rentals
If you have a second home in another location, you can consider utilising it as an added revenue source by renting it out. Many people own properties as holiday homes in tourist destinations that they visit once or twice a year, leaving them vacant for the rest of the time. Such vacation homes or homestays are sought-after by tourists as an alternative to hotel rooms. These properties can be furnished with basic facilities such as Wi-Fi, furniture, storage units, kitchen appliances, etc., for the convenience of the tenants. This enables the property owner to charge a higher rent and generate a steady income.
With the booming tourism sector in India, renting out a residential property through platforms like Airbnb can be an excellent opportunity to earn short-term rentals. One can advertise their rented property on various sites to increase their online presence.
#3. Renting a part of the property
Long-term rentals can be generated by renting the entire property for a fixed monthly rental. This enables the tenant to use the property based on their need. However, another popular trend in India for earning regular rental income is offering paying guest accommodation, which involves renting a part of the property to potential tenants. The demand for paying guest accommodation is high in areas close to educational hubs or bustling commercial hubs that attract a lot of young working professionals. Besides providing accommodation, the property owner is also responsible for providing basic facilities such as food, laundry and other services. This works well for the tenants, mostly students or office-goers, as they can focus on their work without worrying about the basic necessities.
#4. Leasing property for commercial use
Investment in commercial property enables the property owner with the option of diversification and the potential to earn higher rental income. Commercial properties are those used for business purposes and include office spaces, co-working spaces, retail spaces, restaurants or cafes, warehouses, industrial buildings, etc. Typically, investors invest in commercial properties and develop them based on their needs through upgradation, renovations and new construction before renting them out to potential tenants. Thus, buying a commercial property as a one-time investment can be a great way to generate sound returns in the long run.
#5. House flipping
In real estate, house flipping is a popular strategy investors adopt to generate higher profits. This involves purchasing an underpriced or distressed property, renovating or upgrading it and selling the property for a profit. House flipping involves two primary methods:
- Quick flip: Purchasing a property and selling it immediately without any major renovations to capitalise on a booming real estate market.
- Renovation flip: This involves buying a property that needs repairs, undertaking the necessary upgrades, and selling it for a higher price.
When planned strategically, house flipping allows investors to generate significant returns within a short period, especially in a rising market.
#6. Crowdfunding
Crowdfunding is a popular strategy among investors to diversify their portfolios and earn a good income. Many young investors see crowdfunding as a favourable real estate investment model for investing their money. This is similar to equity investing, where retail investors invest some funds to become company owners. Crowdfunding, also fractional ownership in real estate, is a widely used strategy by real estate developers when they are short on funds and need to raise money for their projects. Many small investors pool their money to invest in property’s debt or equity.
The profits generated from crowdfunding will depend on the investment model chosen. In the equity-based model, investors may receive returns based on the rental income generated from the property or their ownership percentage (in case the asset is sold). On the other hand, in a debt or lending-based model, investors will lend money to the relevant entity. While they will not get shares in the property, they can earn a fixed return based on the amount they invest and the interest rate charged.
#7. Purchasing turkey properties
Turnkey properties in real estate refer to properties that investors sell prematurely. Such properties are fully ready for use or renting out by the new owner. Such properties are sold by the investors in specific conditions – when they can manage the property for some reason or have a financial obligation that immediately requires funding. The investor may also sell the property when the tenants are present. If the property is sold, the investor earns immediate cash flow and helps them save money without the need to find new tenants or incur carrying costs.
#8. REITs
Real estate investment trusts (REITs) refer to companies that own and operate real estate to generate income. REITs own and manage high-value real estate properties, offering scope for higher earnings. A person can invest in a large-scale, income-generate property option through REIT, such as big commercial projects – shopping malls, hotels, offices, resorts, warehouses, etc. When the REIT’s value appreciates, investors are likely to gain substantial returns. The investors get returns as a share of the income generated through the commercial property where they have invested.
#9. Real Estate Investment Groups (REIGs), Mortgage Investment Corporations (MICs) and Mortgage-backed Securities (MBSs)
REIGs, MICs and MBSs are companies that invest in private mortgages instead of underlying properties. REIGs are private investments with unique structuring. They provide equity investments or partnerships servicing to investors. MICs and MBSs refer to debt investments. While MICs hold entire mortgages and pass on the interest from payments to investors, MBSs securitise the portions of principal/ interest.
Tips to follow when considering property investment in India
- Financial planning: The foremost thing to consider before investing in a property is determining one’s budget. Make sure to have a proper financial plan and an estimation of the property purchase costs. Using all your finances in one asset class is not a good idea. Do not over-borrow. It is better to consult a financial expert.
- Consider tax benefits: Property investors can avail of tax deductions from properties. They can borrow funds and use a combination of borrowed and saved capital for investing.
- Follow legal due diligence: It is crucial to comply with all the legal procedures during property investment. This includes checking all the property documents, including encumbrance certificates, to ensure no legal issues or financial dues are associated with the property. Maintain property-related documents.
- Determine the type of property: It is essential to evaluate the needs of the property before making any investment. Consider going for ready-to-move-in, which is a better option even for investment purposes (immediate selling or renting). Decide if you want a 2BHK or a 3HK home by assessing the buyer’s preferences, especially if you are planning to rent it out.
- Assess the rental trends: Make sure to conduct a proper valuation to determine the rent based on market trends. You can work with a local broker to assess the rental market trends. If you are looking to earn high rentals, consider investing in big cities that present more opportunities compared to smaller towns.
- Track market trends: When deciding the location for your property investment, it helps to keep track of the latest infrastructure developments. Consider buying a property near an upcoming airport, metro or expressway, as it will lead to an increase in property values.
- Plan for maintenance: Investing in a property also means regular maintenance. The property owner is also required to pay property taxes. Hence, one needs to assess the financial liabilities when buying a property.
- Commercial properties are expensive: One needs to be aware that commercial properties provide higher returns than residential properties but involve larger investment amount.
- Alternative investments for short-term needs: One can consider alternative investment options for short-term investment needs. This will help keep the money utilised and generate quick income.
Housing.com News Viewpoint
The common strategy people to generate income from property investment is through selling when there is an increase in the property’s value. Investors also eye short-term and long-term rentals to earn a steady income. However, there are several other options to explore, such as crowdfunding and investments through REITs. When investing in any property, aa buyer is required to undertake proper legal due diligence to avoid risks. Factors such as location, market trends, etc., should be considered for making an informed decision.
FAQs
How to start generating passive income from property?
One can generate additional income from the property by renting it out to tenants, making some upgrades, and selling it to earn profits.
Which is better – long-term or short-term rentals?
Both long-term rentals and short-term rentals have their advantages. One needs to assess their financial needs to make an informed decision.
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