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Rental properties are considered to be a great source of passive income all around the world. This method seems to be an efficient way to build your wealth, however, you must know the ins and outs by conducting proper due diligence. There are so many factors that you should consider while you are investing in rental property such as the location, market value, rental yield, etc. It has been observed by leading real estate platforms that 41.1% of the investors prefer real estate investment options due to rental yield. With proper planning, knowledge, and experience you will be able to attain your real estate investment goals. Here are some effective tips to earn a steady income from your rental investments.
Creating Passive Income through rental investments
Creating passive income from real estate involves buying a property and then renting them out. Rental properties can be a good channel to earn money, however, a landlord cannot be completely passive and it requires consistent efforts. As a landlord, your tenants will be expecting you to make up-gradations and also to maintain the property. You are also required to invest some time in researching your property to find out any development projects and to advertise your space. Follow these tips to earn a good passive income and to make the best investment choice.
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Research
While planning your investment, you must conduct tons of research to identify the best location. You can evaluate your ideal location for investing by checking the facilities already available and the scale of development, you can shortlist your ideal locations for investing. You can then check for rental investment opportunities and then check the monthly rental yield. By doing so you know how much to spend and how much to expect out of an investment.
As a landlord, you must know some of the laws applicable to rental investments. The Rent Control Act, 1948 provides against the exploitation of landlords and tenants by each other. Each state has its rent control and the law mandates the drafting of a rent agreement that enumerates the terms of the tenancy. As a landlord, you must know that you have the right to evict, charge rent and have the right to temporarily repossess the property to improve the condition. You should also know that your tenant has the right to have a quiet environment to live in and has his right to privacy. Under the Model Tenancy Act, the landlords also have the right to discourage the overstay of tenants, make eviction and also prohibit the tenants from subletting as well. The Act also states that the security deposits, equal to one year’s rent, to be deposited.
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Do the math
After the researching stage comes the selection stage. While selecting a property make sure to invest in a property that is not way beyond your budget. Also, make sure to invest in an area that is capable of yielding you rental returns which is sufficient enough to cover your mortgage payments if you are investing through leverage. It is also important that you check the utility charges and the loan interest rates if you are opting for a loan to finance your property. Thus you must sit down and calculate your expenses to determine the rent to be charged.
Some of the most common expenses you should consider include the EMI in case the property is financed through a mortgage. You can use online calculators to determine your EMIs. You should also calculate property tax to cover your tax burden using your rental yield. It is recommended that you ask your tenant to pay you separately for the rent charged and for the maintenance charges as you can claim standard tax deductions.
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Invest through Loans
If you don’t have enough cash to invest in a real estate property, then you can invest in real estate through leverage. By investing through bank loans you can claim deductions on your tax burden under Section 24 and Section 80EE based on the interest paid. To avoid the excess burden, it is recommended that you make down payments from your savings. Most of the lenders will also require you to make 20% down payments to secure loans. It is also important that you maintain a good credit history and also a good credit score. You can keep a score of 620-740 to easily secure a bank loan. It is also important that you make sure that your debt to income ratio is below 36% as on the contrary, you may not be eligible for a bank loan. The lender to grant the loan may require you to show a cash reserve which is worth 4-6 months EMI as well.
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Advertise your space
As soon as you get your home loan approved, you must advertise your rental space. You can take the assistance of online platforms to advertise your space. You can also take the assistance of real estate brokers to advertise your property. Make sure to provide proper contact details for all your potential investors.
On receiving an application from the tenants, it is important that you carefully screen the applications. It is recommended that you check the credit history of the tenants. Make sure that you check if they have missed loan repayment or eviction on their records. Make sure to contact their previous landlords to check and you may also ask for a reference from their previous landlords. By doing so you can check if the tenant has a history of missed rental payments. Also, check if they have a steady income and a stable job. On finding a potential tenant, you can enter into a rental agreement.
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Be a good landlord
On completing the process of investing and finding a tenant, you must be a good landlord! Make sure to explain the breakdown of the rental amount to your tenant and also make sure to respond to any maintenance requests quickly. By respecting your tenants and adhering to their requirements, you can build goodwill and also have the benefits of long-term tenancies.
How Much Do I Need To Live Off Passive Income?
Living off passive income can be a dream for many. However, it takes years of hard work before you can finally quit your regular job and start covering all your expenses using your passive income options. The exact amount required to live off passive income cannot be determined; however, an estimate can be calculated depending on your lifestyle, financial position, and location. If you are residing in an affordable area and if you are debt-free, then you can live off your passive income even though it is less but sufficient enough to meet your expenses. For an increase in your passive income saving, it is recommended that you diversify your assets among different passive income options such as crowdfunding, stock, etc. You can also invest in rental properties in different markets to reap the benefits of that market as well.
Bottom line
To create passive income channels you will have to start at the investing stage and later rent it out. You must conduct proper market research and learn about your tenants before giving out your property. You must evaluate the different investment options before you finalize your property. As a good landlord make sure you know all the relevant laws concerning tenancy. It is also important that you choose your investments based on your earning capacity and based on your ability to furnish EMI if investing through loans. It is recommended that you invest in properties having an EMI of less than 45% of your family’s total income to financial risk.
All these tips may be useful if you’re doing everything on your own. Getting an investment done through players like Assetmonk takes out the majority of the load. By investing with us, you need not worry about doing intense research, calculations or advertising your space. To kick start your rental investment in Bangalore, Chennai, and Hyderabad, visit Assetmonk now!
Important tips to earn maximum passive income from rental investments FAQ’s:
How can I make my rental income passive?
You can make passive income from real estate by conducting proper research and doing your calculations. You must check for properties in locations with growth prospects. Make sure to screen your tenant and to check their income source, previous tenancy, etc.
Is rental income a passive income?
Rental incomes are not exactly passive and require active participation from the landlord. You will have to actively conduct research and also conduct frequent visits on your property to check for any defect in the property. The landlord should also actively collect the rent to avoid any arrears.
How do rental properties make money?
By choosing the right property and letting it out on rent, you will be able to earn from your rental investments. You can make certain modifications and improvements on your property to earn higher than the normal rent. By investing in rental properties, you will also have an edge over inflation and thus with the increase in the inflation rate, your rental yield also increases.
