Buying a property for rental income? Think again

With the demand for housing in urban areas going up due to people returning back to work, rentals have been soaring

I often get asked about investing in a property as an investment for retirement planning. For long residential property has been a useful way to generate a sure shot and inflation-proof regular income in form of rent. It also has been looked upon as an easier and failproof way to grow wealth compared to investing in equities. 

With the demand for housing in urban areas going up due to people returning back to work, rentals have been soaring. But every house may not provide good rental value. The neighbourhood, the housing complex and the amenities accessible in the locality have a huge bearing on the rent.

A friend has been trying to rent out her independent house for over a year to working professional tenants. Due to the house being in an older part of Bangalore and not being close to IT office areas, renters stay away. Families also want to have access to amenities like gyms, children’s playgrounds and more importantly security surveillance to have a better living experience. They do not want to bother about where the water will come from or run after the local authorities in case of small issues. 

Owning a property in prime areas in a gated community may give good rent but one needs to have the time to manage it. Finding a reliable tenant is a task. I came across a case where a lady tenant didn’t pay rent for months and called a support group claiming harassment by the owner when asked to evict the house. The property also needs to be kept well by the renters, which may not always be the case. Repairs and issues like leakage seem to be perennial time-consuming problems. All this takes serious time and effort not to mention costs. So the decision to buy a property for rental income should also be based on whether one has the bandwidth to deal with everything required to earn the rental income.

From a financial perspective, rental yields (annual rent/value of the property) of 2-3% are not attractive. Even with the appreciation in the property price, investors can expect 7-8% per annum returns overall. Due to the absolute rental amount being a decent amount, investors perceive that they are making good returns. But that is not the case.  The maintenance and repair costs eat into returns, thus reducing the rental yields further by 0.5-1%. 

The tangibility of returns gets investors to consider property for regular income over other investments. However, if monthly income is the main consideration, a simple bank deposit will give a 4-5% per annum higher return, with much better liquidity than property.

Investors who do not want the hassle of maintaining their property may also consider Real Estate Investment Trusts (REIT) which can provide them with a distribution of 5.5% per annum (pre-tax). 

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