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Business News/ Opinion / Before you rent out the property

Before you rent out the property

Picking a tenant for your apartment can be very tricky

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

Looking to rent out your apartment? Well, there are factors besides the income that you should mull. The first step is to seek a good tenant, either by placing advertisements in newspapers, Web portals or seeking referrals through family or friends. In either case, a thorough background check is a must (including police verification of the tenant). Once you have your tenant, draft a detailed rental agreement with specific clauses on everything from tenor to damages to termination. It is mandatory to draft a short-term agreement, to prevent squatting by tenants.

For non-resident Indians (NRIs), besides the above, turning their apartments into corporate guesthouses may be a better option.

Get the rental math right

Though rental rates largely depend on demand-supply, they do not directly reflect actual real estate prices. High real estate prices in India have kept rental yields (rent as a percentage of the annual value of your property) limited to 2-3%.

But besides the hard numbers, key factors such as location, availability of social infrastructure, connectivity to the main city, age of the property, and so on, are critical in determining the rent you will be able to charge. With tenants becoming more selective by the day, a tidy, spruced up apartment will fetch higher rent than a plain one. A sound knowledge of rentals charged in other properties in your neighbourhood and community will also help.

Spread the word…but choose the tenant carefully

The first step to renting out your apartment is to advertise.Though newspapers are the traditional route to spread the word, in the age of social media and real estate Web portals, going the online way will expedite your search process. Alternatively, opt for the referral route—ask friends and relatives to scout for potential tenants. Approaching the local real estate agent/broker will also help you make a stronger pitch. In case you utilize the services of a broker, you may also have to split the brokerage with your tenant.

The trickier part, though, lies in picking the right tenant. A complete check into your prospective tenant’s antecedents is necessary to ensure that you get a clean deal. Though a well-paying tenant may seem ideal, it may not be enough. Besides the usual set of identification proofs, ensure that you obtain the following documents:

l Police verification: You must also ensure that your tenant is not involved in illegal activities. Verification of the tenant at the local police station is now mandatory. Ignoring this could even render you punishable under section 188 of the Indian Penal Code.

l Certificate from employer: Obtain a letter from your tenant’s employer certifying that she is indeed working with the said organization (for at least three months in the same firm).

l Reference from previous landlord: This could be very useful in selecting/eliminating a tenant as previous landlords could reveal critical aspects such as payment history, lifestyle and behaviour.

l Permanent address: In case the prospective tenant is a migrant bachelor/spinster, make sure you obtain a valid permanent family address and cross-verify the same.

Once you arrive at a verbal agreement with the tenant, you proceed to the most important step—drafting the rental agreement (leave and license agreement).

Pen to paper

A rental agreement must be carefully drafted, checked and verified by an independent property lawyer to be complete in all respects. Moreover, any rental agreement must be prepared only for a short tenor of 11 months. Moving to details, any rental agreement must cover the following aspects:

l Paperwork and verification: Ensure that the tenant submits all documents and get them independently verified.

l Payments: This is a long list, but ensure that all expenses are equally split with the tenant. The agreement should also spell out clearly whether the tenant bears recurrent expenses.

l Nature of lease: This must be clearly specified and normally restricted to residential purposes, so as to prevent tenants from unduly profiting from commercial activities or subletting.

l Item list and damages: If it’s a furnished flat, the agreement must include a list of items offered along with the flat and specify the damages, in case of any damages caused by the tenant.

l Termination and renewal: The agreement must also contain detailed, special clauses indicating the notice period to be given for vacating the property at the end of the 11-month tenor.

Last but not the least, while it is the owner’s decision to rent out her property, the cooperative housing society, to which the owner belongs to, also has a say on the tenancy and can even deny it based on certain bye-laws. All charges, such as maintenance charges, water tax, parking charges, utility bills may also be charged to the tenant (or included in the monthly rent).

The way out for NRI landlords

NRIs looking to let out apartments in India could go the traditional way or turn their apartments back home into corporate guesthouses. With multinational companies (especially in the information technology sector) spreading their wings across the country, the need for residences to house migrating employees is steadily rising. Therefore, corporate guesthouses could prove a steady source of income for NRIs. Moreover, the idea of a corporate tenant brings with the reliability and credibility that may not be the case with individual tenants. And your house will be well-maintained. Nevertheless, the legal aspects stand the same even for such deals.

Saying “to let", therefore, may seem attractive monetarily, but say so with caution and prudence.

Binaifer Jehani is director, Crisil Research.

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Published: 13 Feb 2014, 07:26 PM IST
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