Why rental income may not be the right option for you3 min read . Updated: 25 May 2019, 07:55 AM IST
- Investing in property comes with multiple hassles in the form of maintenance cost, documentation process, cost structure and it is an illiquid asset
- Most homeowners may look at the value of property but forget to assess the returns in the form of rental yield
MUMBAI : If you are planning to buy a house to earn income from rental yield, you may want to think again. Most homeowners may look at the value of property but forget to assess the returns in the form of rental yield along with all the hassle of handling a real estate. To begin with, metro cities such as Mumbai and Delhi give a rental yield of 1.5%-2%, according to property consultants. “In Mumbai, rental yield on commercial properties is 7-9% whereas for residential property it is around 1.5%-2%," Mudassir Zaidi, executive director-north, Knight Frank. Similar is the situation in Delhi too. “The rental yield in Delhi is always below 2%. For instance, typically a 1,500 sqft 3 BHK (bedroom-hall-kitchen) will cost ₹3 crore and the rent will be ₹30,000- ₹40,000," said Sunny Katyal, director of Investors Clinic.
WHY ARE THE RENTAL YIELDS LOW?
The property prices and rental yields are closely linked to each other. “Properties that are more in demand and have higher buy price will be at the lower end of the yield curve and properties that are not in demand will see a little higher rent. In some cases, rental yield has slightly increased because rents have remained same or reduced but the valuation of property has fallen," said Zaidi. The oversupply of residential projects has also impacted rental yields especially in metro cities.
“In Delhi-NCR, the houses that were pre-launched in 2007-12, we saw delivery of these properties happen in 2017-18. There was a time when the supply of homes was higher in Noida. It is very inventory specific," he added. High inventories led to fall in rents.
“Delhi-NCR has larger number of investors in the market and most investors are stuck and they are willing to reduce prices to get out of the market. The problem is more in Delhi. Rental yield is better in Delhi but the valuations are not great. In terms of valuation, Mumbai is still doing better," said Zaidi.
THE COST OF INVESTMENT
When you buy a property, you incur a cost over the value of the property. Most home buyers forget to factor in the additional cost. For instance, if you are buying a property worth ₹1 crore, you will also have to factor in the home loan cost, administration cost and other charges associated with stamp duty and registration. Once you get the property, you continue to shell out money in the form of property tax, maintenance cost and society charges till the time you own the property. When you are doing the math of the rental yield, you need to factor in all the associated cost to get the right picture. Value of the property by itself doesn’t give you the complete analysis.
SHOULD YOU BUY TO GET RENTAL INCOME?
In residential properties, the returns come from capital gains and in the form of rental income. “In Delhi, price of real estate is very high. If you are buying property in Delhi for personal use, it still makes sense. However, there is no use buying property to get rental yield," said Katyal. According to property consultants, for residential property buyers this is not the right time to buy and it is better to stay away from the market. “Investing in residential property from rental point of view may not be a great idea in today’s time. May be when prices start increasing again, you can look at residential property in, say, two years," said Zaidi.
In fact investing in property comes with multiple hassles in the form of maintenance cost, documentation process, cost structure and also it is an illiquid asset. Hence, evaluate your financial portfolio before investing in real estate.