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If you have inherited or bought a house, or upgraded to a bigger property in the last few years and continue to own the old house for investment purposes in the hope that real estate prices will only increase, you may have been disappointed by now. In the last few years, prices have either remained stagnant or decreased in major markets across the country, and there are no signs that the trend will change anytime soon. In this scenario, there are only two choices: selling the property or putting it on rent. If you want to sell the house, read what experts suggest should be your exit strategy here.
However, in the current market situation, chances of capital appreciation are very low, and renting out a property does make sense. It allows you to make a little money (typically 2-3% of the property value annually) every month, which could help you in paying off a certain portion of your equated monthly income (EMI), if any, or enhance your return from the assets.
Do you want to rent out?
The first question to ask yourself is whether you want to rent out or not. Making decision to rent out your house is not always easy. Say, if you have inherited a house or lived in a house before, renting it out could be tough on you emotionally. Also, it’s time-consuming. To start with, before looking for tenants, you have to look into repairs and maintenance aspects of the house. A house you bought a few years ago may not be in the condition to be put on rent. Then there is advertising or dealing with agents in order to find a tenant. It doesn’t stop at that: there is rent to be negotiated and legal and other formalities to be completed before the tenant finally moves in.
Even during the tenancy, you may have to interact with your tenant regularly for rent and other issues, handle maintenance and repairs, and deal with any emergencies that may come up.
If you are ready to do all that and more, here are five things you should consider before renting out your house.
Decide the rent
The first thing you need to decide is how much rent you should expect. “The rental market is, almost by definition, price sensitive,” said Anuj Puri, chairman, Anarock Property Consultants Ltd, a property broking firm. A landlord should research rental rate trends for the given location and property typology and ensure that the property has not been priced off the market, added Puri.
Remember, there are various factors which determine the rent of a house such as its location, amenities, neighbourhood and infrastructure. But the most important factor is the condition of the house itself.
“Newer homes will rent out for more, but renovated flats in older projects can earn almost as much as a new one,” said Puri. But before you decide to renovate the house, see if it makes sense for you. “You need to weigh the cost of renovation versus the potential increase in the rent amount,” said Puri.
Look at tenant, tenure
Another thing you should have clarity on is the type of tenant you want. Simultaneously, you need to figure out how long you want to let out your property. “It’s important for a landlord to understand whether they have bought the property as an investment or for personal use. This helps them in identifying the kind of tenants they would like to engage,” said Saurabh Garg, co-founder and CBO, NoBroker.com.
For instance, homeowners who have purchased properties in high-growth areas purely from an investment standpoint are more willing to let it out to students and/or working professionals for a couple of years, while people who view their property as a home for personal use generally prefer renting it out to families for longer durations, explained Garg. This is also true if you are renting out a floor in the house in which you live yourself.
Draft a rent agreement
Many home-owners are reluctant to put property on rent because they don’t want to put their asset at risk for a nominal return. Typically, rental yield from residential property in India is between 2% and 3% of the property value per annum. “Letting a house on rent to a complete stranger has certain inherent risks, such as property damage, delay in rent transfer or complete non-payment, and refusal to vacate the property after the expiration of the pre-established timelines,” said Garg.
To avoid problems and mitigate the risk, landlords should draft a robust rent agreement. “A lot of the risk can be reduced by an air-tight rental agreement which clearly enumerates the rights and responsibilities of both the landlord and the tenant,” said Puri.
“Landlords should include relevant clauses into the rental agreement and collect a security deposit,” said Garg.
Get verifications done
Once you find a suitable tenant, discuss the terms and conditions, and insist that she goes through the clauses mentioned in the rent agreement you have drafted. If need be, make the changes as per mutual understanding and draft a final rent agreement for registration. Remember, “rental agreement should always be registered with the local authorities in order to become a valid legal document,” said Puri.
In case the tenant starts troubling you by not paying rent or not agreeing to vacate the house when you need it, a registered rent agreement would be the only weapon that will help you.
Besides, even if you conduct detailed background check of the person taking your house on rent or the tenant was referred by a known person, it is wise to go for police verification.
Do regular inspection
Your work is not over as soon as you let out the house. You should visit the house once in a while (monthly or quarterly), to inspect whether the tenant is keeping the house properly or not.
It also works to interact with neighbours and take feedback about the tenant. You should also keep an eye on whether the tenant is paying utility bills, society maintenance charges and other expenses on time.