Real Estate is one of the most popular investment avenue in India. Income from Rent is backbone of Retirement Planning in India. When a property is bought for investment purpose, the key concern of any investor is Rental yield from the property i.e. how much rent, he can fetch from the property. It is very logical and genuine concern. Though Rental yield of Commercial Property is very high compared to Residential Property which i highlighted in my post Commercial Property vs Residential Property. Due to high cost and risk associated with the commercial property, investors prefer Residential Property and settle for lower rental yield.
In order to earn higher rent from your house, you can adopt 2 Step approach. In Step 1, we will discuss about the product/property i.e. how we can charge premium. In Step 2, we will discuss how to sell and whom to sell to gain maximum returns i.e. max rent. Through these steps we will try to fetch Rental yield of 4% compared to average rental yield of 2.5%. Lets start with points related to Step 1.
House Furnishing
Some people find it very difficult to rent their property. Besides location, another major factor is House Furnishing. Before renting a house, it is advisable to convert it into a livable condition. Some people say that house is unfurnished therefore to save some money, they simply try to rent a basic structure. It is very common in Mumbai and Delhi. The owner fail to understand that to save few thousand Rupees, he will incur long term loss on rent. Some of the basic requirements of unfurnished house are fresh paint, fans, light/tube lights, curtain rods, geyser and basic woodwork for storage/cupboards (If renting to a family). All taps, flush & shower units should be in working conditions. Overall the house should be clean and tidy. The total cost for all this work is around 75k – 1 lakh depending on quality of work and cost may vary from city to city. As an owner, you should ask yourself whether you will rent the same house for your family and pay the asking rent.
An unfurnished house can be converted to semi-furnished by additional investment of 75k – 1 lakh which will increase rent by approx 4k – 5k per month. Investment can be recovered through rent in 15 – 18 months. For semi-furnished house, additional requirements are Bed, TV, Fridge, Sofa, Dining Table & Utensils. Microwave & Washing machine are optional. If there is severe electricity shortage in your area then you can offer installation of inverter wiring to tenant. You can buy most of these items easily from portals offering 2nd hand items. It will reduce cost by 50%.
Services
When anyone move in a rented accommodation; the biggest problem is to find maid, newspaper vendor, milk vendor, cook etc. If owner is staying in same city/apartment then he/she can offer to arrange vendor for all these services on complementary basis but can charge slight premium in rent. You can market your property that tenant will not face any problem on this front. This point will be more relevant for female member (Wife or mother) accompanying potential tenant. The objective is to make move-in experience hassle free.
Value Added Services
It is always advisable to offer multiple variants to tenant e.g. you can ask Rs 20,000 rent for unfurnished flat and Semi-furnished flat rent is Rs 23,000 with add-ons (clearly mentioned). It will give flexibility to tenant to select right option. In many cases potential tenant is not willing to spend extra on certain items and opt for add-ons. You may offer extra car park or minor modifications based on tenants requirement. Psychologically, probability of renting a property is high if you provide options and value added services are priced separately. It give flexibility to tenant and he thinks that he/she is getting a fair deal.
Flexible Approach towards Rent and Deposit
Normally i have observed that owners adopt very rigid approach while letting out the property e.g. in Mumbai, its a norm that 11 months deposit is must. In my personal opinion, a more humane approach can help to build long term relation with the tenant. In many cases like newly wed couples, they can’t afford high deposit initially or a family going through financial crisis. In such cases, potential tenant is willing to shell additional rent per month provided owner agrees for 5-6 months rent as deposit. Flexibility on Rent and Deposit from owners end can help to retain tenants for longer period. Please understand that if the flat is vacant for 1 month then it will be notional loss thus eating into your returns. In many cases, i observed that owner agree to collect deposit in 3-4 installments along with rent to comfort the tenant. Probability of tenant’s stay is high if owner is good. Moreover tenant will not mind paying extra rent if his stay is comfortable and he share good rapport with the owner. It is difficult to find good tenant and moreover in cities like Mumbai broker charge 1 month rent from both tenant and the owner.
With this, i have discussed all the imp points related to Step 1. Now lets discuss Step 2 i.e. How to sell and Whom to sell
Explore all channels
Good Marketing is key to Maximize returns. You should explore all online and offline channels to advertise/rent your property. I have observed that some owners are comfortable to put their property on Rent only through brokers. Trust me it does not add any value except mental satisfaction. These days tenants prefer direct dealing with owner as it help them to save brokerage. You can always go for police verification of tenant or may demand reference letter from the office of tenant where he is working. Another advantage of online advertisement is that you can put pictures of your property which help the tenant to decide before physical visit thus saves time. Online channel will help to reduce lead time i.e. property can be rented in short time.
Rent Type
Last but not least how the property is put on rent. Broadly a property can be rented to
(a) Family
(b) Paying Guest / Bachelors
(c) Serviced Apartment
Each of the above mentioned Rent type has its own advantages and disadvantages. Lets check important points
(a) Family: You can let out unfurnished flat to family. Among all 3 Rent types you will get least rent from family. You can expect a max rental yield of 3% from family. Advantage is that family will maintain the property well therefore recurring maintenance cost will be less. You can expect rent on time and need not to worry about security of tenant as in case of Paying guest or Bachelors. You can do background verification of a family.
(b) Paying Guest / Bachelors: You can expect 40%-50% higher rent compared to family but this rent type is most hassled way of renting out. A 3 BHK can be rented to 6 Bachelors as a PG. Rent collection is major headache. Recurring maintenance cost will be high. Major concern of owners is regarding safety especially if the house is let out to female PG’s. Don’t expect maintenance of house, just close your eyes thus recurring maintenance will be high. Bachelors are very mobile and its a headache to find new tenant every alternate month. Lastly, owner cannot keep tab who is staying on rent in his house if he stays outside the city. For one of my client in Singapore, during surprise visit he found that none of the 4 bachelors who rented accommodation from him are staying in the house. They sub-let to another set of people without owners knowledge. Normally accommodation in this rent type is semi-furnished. There is lot of debate whether this type is considered as Residential or Commercial.
(c) Serviced Apartment: Its a fully furnished and fully maintained apartment with facilities like working kitchen, house keeping staff, centralized security, WiFi, electricity back up, laundry service, all Home Appliances etc. All the equipments and amenities should be of good quality. It is similar to a hotel. Its a commercial facility therefore income from serviced apartment is treated as Business Income and you need to get commercial electricity / water meters installed. Owner need permission from association and from local municipal corporation. These apartments can either be leased to professional agencies or company. Initial cost of set up is very high in the range of 8-10 lakh but rent is also very high for serviced apartment. You can expect a rent of 1-1.25 lakh per month for fully serviced apartment. It doesn’t make sense to convert single unit in serviced apartment because maintenance cost is very high. Location is very imp as Serviced apartment should be located near business hub or CBD.
Based on the above mentioned points, you can maximize your rent depending on initial investment and comfort level for particular tenancy type. With few add-ons and value added services you can get incremental rent from your apartment. Depending on location of your property, you may convert it into premium rented property through furnishing. Advantage is you will get higher rent and decent tenants. Normally owners prefer service class family as tenant. Specific professions like lawyers, police etc find it difficult to get house on rent. In cities like Mumbai, owners prefer to change tenant every 11 months because of local rent act.
On lighter note, i would like to quote one of my known person who is a builder that “A tenant can never become OWNER of a property, if his landlord is Good Human Being” :)
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Yet another true fact nicely put across for laymen like us.
Appreciate for sharing the knowledge.
Thanks for liking the post.
Hi Nitin, I have purchased an under construction Flat and have paid 70% pf the property cost till date and have also done the registration. I am in a financial crisis right now and can’t afford the other 30%. What could be my options in this case? can my booking be cancelled?
Best solution is to sell the property.
Hello Nitin, Thanks for your suggestion. i agree with what you’re saying as the property prices have increased as well in that building. But, i only have untill this month to clear my dues with the builder. i will try to sell the flat but if things don’t work out, i just wanted to know if it is my legal right to cancel the purchase or cancellation can only happen on request basis?
I need to check your agreement to answer this query.
is it okay i i send it to you via email?
I can go through your documents and answer the same but any personalized consultation is available on chargeable basis. If you wish to avail the same then you can call me on +91 94800 21000 to discuss.
May I know how much you charge?
Email shared to post comment is not correct. I request you to call me on +91 94800 21000 to discuss further.
Hi Nitin, I have purchased a 3BHK flat in Pune. The flat is in my wife’s name and my father and I are the co-owners. We have taken a home loan from SBI that is again in the name of all 3 of us. My father owns 2 houses in Belgaum. He resides in one of them and has let out another on rent. While my father will continue to stay in Belgaum, me and my wife will be staying in the new flat (under construction). Is it necessary for my father to show a notional rent in case of the new flat? If yes, then how much?
Out of 3, he can declare 1 property as Self occupied where he is actually staying and which is in Belgaum. Other 2 properties will be deemed as Let out properties i.e. 2nd one in Belgaum and 3rd one in Pune. In case of let out property, if he is not receiving any rent then he has to declare notional rent to claim loss from let out property.
Hello Nitin,
I am receiving rs.9 lakhs rent from commercial property and rs.3 lakhs from residential property. I have also given a part of my commercial property on lease for a fixed amount on which i am not receiving rent and the lease amount is refundable. I do not come under service tax bracket as my commercial rent is under exemption limit and there is no service tax on residential rent. My accountant is advising me to gift the residential property to my son or wife so that the rent doesn’t come in my account to avoid service tax issues in future. He says they will see total Rent as Rs.12 lakhs and send notice in future for service tax which sounds absurd to me. What do you advise ?
I agree with your accountants point of view that your total rent will be accounted as 12 lakh which is more than exempted limit of 10 lakh therefore service tax is applicable in your case.
I disagree with him that by gifting the property will solve your problem as provisions of clubbing will be applicable. If your wife is housewife and son does not have any source of income & you gift property to either if them then their income from gifted property will be clubbed in your income which is taxable.
Thank You Nitin for your reply.
This is very confusing. Some CA’s tell me that its not an issue because residential rent is under negative list of service tax. So it will not be clubbed with my commercial rent and is exempted from service tax.
Also my son is already having a property and earning residential rent on that so can i gift him another flat ?