Do’s and don’ts to secure a profitable rental investment
Investing in real estate can be an absolute benefit to your investment portfolio, but it is not a commitment that you can enter into without careful research and the right knowledge. If you are planning to enter the rental arena, you must know the different do’s and don’ts of a rental investment as it is only then, you can utilize your investment to earn maximum profit. Becoming a successful landlord takes a lot of effort and patience. By educating yourself about the rental investment, you can avoid critical mistakes while purchasing your rental property. Here are some tips that will help you in identifying the most profitable option.
The do’s while investing in rental property
Investment in a rental property is rewarding when you know what you should do and what you shouldn’t. Here are some must-do steps while investing in a rental property.
Do check the growth prospects of an area
The quality of the location is a very important factor to consider as it will give you a clear picture of the kind of renter you will get, the frequency of the vacancies, the rental amount that could be charged, etc. Let’s say for example you are investing in an area that is close to universities, the odds are that a large portion of your tenant will be a student. You may also face frequent vacancies every year-end when the senior students complete their education and return home or even during the holidays.
While evaluating the property for investment, make sure that you check for the public parks, shopping malls, gymnasiums, cineplex, public transportation, healthcare facilities, schools, and all the other factors that would help in conceivably enticing the tenants. To check for such facilities in a neighbourhood, you can always check through the developers’ project brochures or just simply do online research about the locality and the reviews about the locality.
Localities are prone to development. Thus you should also consider and evaluate the development projects in an area by the local municipality to make a good decision. Ideally, you should check if the location has growth prospectus and development plans in terms of schools, business parks, shopping malls, and entertainment zones.
While researching the area, it is also important that you check for one or more good schooling facilities in your locality as your tenants can be people with families and this could be a great add-on to the list of reasons why a tenant should prefer your property over others. Areas that are proximate to the business hubs providing employment opportunities can also be a good spot for investing in rental properties as they will attract more tenants.
The tenants today are also looking forward to identifying spots that could add value to their lifestyle as most of the properties offering all the best lifestyle deliverables may be out of their financial limits. Thus rental homes providing these facilities tend to attract more tenants. The ambience, sitting area for the elderly, play area for the children, etc. are some of the amenities that people look for in a rental property to determine if it is worth the rental amount or not.
Do proper research to quote the best rental amount
You must conduct thorough research before quoting the rental amount. You have to check through the typical rents in a region and make sure that you collect necessary information about the development activities in that region for the next 5 years. Since the property tax varies based on the development in a locality, you must check the growth prospectus for the next 5 years to check if you can afford the property and how much you should quote as rent to make a profit.
Single-family homes are more likely to attract tenants that are looking for long-term lease and in the case of dual-income families, it may be preferred by single professionals that are keen on paying their rent on time to ensure fiscal stability. While shortlisting on the ideal location for investment, you must check if there is a potential in the property to yield stable and growing rental income along with its potential to reap capital appreciation. To reduce the financial burden on the investor, it is recommended that you look for properties within your budget or slightly higher than that.
You can also earn a higher rent if you make certain modifications and improvements on your property to match the trends. Security is a topmost priority of individuals and providing advanced security measures can also help in increasing the demand for the property. Areas such as Undri, Kothrud, and Ambegaon in Pune, Koparkhairane, Airoli and Ulwe in Navi Mumbai, Electronic City, Sarjapur Road, and Whitefield in Bangalore, etc. are some ideal locations which reap high rental incomes.
Do calculate the ROI on your property
With the sophisticated growing technology, it is now easier to run the numbers on your rental investment to know your returns. There are online mortgage calculators which help you in assessing the big picture of your investment with much accuracy. Make sure to calculate your ROI to check if an investment is worth the money or not. While determining your ROI, you must consider repair and maintenance expenses, the borrowed money with interest, cost of improving, tax payable, etc.
Do take your responsibilities as a landlord seriously
Any rental investment requires time and energy as it is like carrying out a business. It is your responsibility as the landlord that you check through the rental laws and other legal requirements. You should ensure that you provide a safe and habitable environment for your tenants to reside in. Keep in mind, the better the service provided, the longer the tenants will stay. Thus make sure that you respond to all the problems of the tenants irrespective of it being large or small. You must visit the property regularly and conduct an inspection on the property to check for any repair works that need to be made.
Apart from the services you provide as the landlord, it is also important that you know the importance of collecting rent regularly. Some tenants tend to delay their payments and thus cause trouble in your cash flow. Thus you must know how to deal with delinquent tenants.
If you are not very well aware of how to carry out the management activities of your rental property, you may also hire a property manager or a caretaker. However, hiring them can reduce your return from the property as well.
Do take advantage of tax deductions
Property tax is an important factor to consider while making investment decisions as property taxes aren’t standard. When you are looking forward to earning from a property, it is also important that you check how much you are about to shell out as well. If the area you are looking forward to investing in is an already developed location with lots of business parks and public amenities attached, there are chances that the property tax in such a locality is high. Thus it is recommended that you invest in corridors that are still under development.
While calculating the amount you have to pay as tax, it is also important that you know the deductions granted under the Income Tax Act in terms of interest rate, if you have invested using borrowed capital, insurance, etc. You can also deduct any expenses incurred by you on the property. Since most of the rental investments include physical structures such as buildings, you can also deduct tax by applying depreciation.
Section 24 and Section 80EE provide for a deduction on rental properties that are financed through bank loans. You are eligible for set-off on salary, business income, capital gains, etc. if a loss over Rs. 2 Lakhs has been incurred by you under the head ‘income from home property’ for eight subsequent years.
The don’ts while investing in rental property
The notion of being able to collect rental income regularly and having a healthy cash flow is a dream to most landlords. However, in reality, landlords face several problems such as tenant problems, late rental payments, capital expenses, etc. that are both significant as well as unexpected. Here are some don’ts to increase your profitability.
Don’t ignore your expenses
Being a landlord calls for additional financial outlays apart from the initial capital. All these financial requirements need to be met. Thus you mustn’t overlook more financial outlay. You must efficiently calculate the various expenses on your property such as the taxes, insurance, loan interest rate, maintenance and repair cost in case of a plumbing issue, water leak, broken hardware, or fire damage, etc., to effectively plan your investment strategy. If you are investing through leverage, then it is always recommended that you do not invest in a property that has a monthly instalment of more than 30-35% of the total family’s income as it will seriously affect the cash flow and cause a financial burden.
Don’t underestimate the time involved
Rental income is not very passive and demands the active involvement of the landlord. It may be time-consuming as you will have to vet and choose your prospective tenants. You must take time and conduct a background test of your tenant to know if they are regular in clearing their rental dues. You mustn’t rush and get all the paperwork and maintenance work organized. It may also take you some time to deal with your tenant’s needs. By taking your time, you can have a hassle-free investment and also satisfy your tenants.
Don’t invest in a property just because it is less expensive
You mustn’t get blinded by the cheap price quoted on a property. Make sure to conduct proper due diligence and check whether the property has access to basic amenities and public transportation. At the bottom line ensure whether the neighbourhood has a good potential for investment growth while allowing good returns in the short run.
Purchasing an investment property is often more complex than investing in a principal residence. This is simply due to the additional care that needs to be taken while investing. You must check factors such as the type of building, area of the property, type of tenancy, tax implications, growth prospectus, ROI, etc. to determine whether it’s profitable. If you take the necessary precautions, you surely will be able to eliminate crucial risks and get both long-term and short-term payoffs.
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Do's and Don'ts to secure a profitable rental investment FAQ's:
Rental properties have been used traditionally as the best way to earn passive income from a real estate investment. The biggest merit of rental income is that it can be adjusted based on the inflation rates. Many also opt for rental properties as they help in building equity.
Yes, investing in rental properties is a good investment as you will be able to earn a stable income from your property. The investments earned on your rental property vary based on the type of property (commercial or residential) you chose to invest in. The earning power of commercial properties is way higher than in the case of residential properties. Rental properties are also an efficient way to diversify your portfolio.
You can earn a higher rental income by making modifications and improvements to the property. By providing amenities such as a good ambience, sitting area for the elderly, play area for the children, etc. you can attract more tenants. The proximity to business hubs, public transportation, and basic amenities such as retail shops, educational institutions, healthcare units, etc. can also help you earn a high rental income.
While determining good ROI on your rental income, you must calculate the capitalization rate which is based on the net income-generating capacity of the property. Thus any property with a cap rate of 8-10% is considered to be a good option.