Real estate investment is ultimately about making profits whether you use it or rent it out. You want to make money and create wealth. The housing market, however, may be tricky. Housing demand in a locality and rental values of a property are dynamic, fluctuating up and down. If you are keen on buying a rental property, you must know the pros and cons of owning a rental property.
So, what is rental property? Rental property is any property you acquire simply for rental income. Residential rental properties come in different configurations and sizes: independent homes, flats, villas, etc. Depending on your budget and your assessment of housing demand, you may take a pick.
Why Do People Invest in Rental Property?
You may want to diversify your portfolio or to generate additional income. However, you need to withstand tenant tantrums, falling demand for homes in your locality, lower rentals with the increased supply of homes, etc.
Evaluating the pros and cons of owning a rental property would enable you to make the right assessment before you sign the dotted line. Let us look at the advantages and disadvantages of owning rental property.
Rental Property Pros
Portfolio Diversification
You would not like to put all your eggs in one basket. Along with the traditional FDs, shares in the stock market, mutual funds, gold, etc., many investors invest in rental property to diversify their portfolios.
Less volatility
You may purchase stocks in the share market and may not be able to withstand its volatility. With properties, there is less volatility in real estate prices. When the fluctuations are fewer, you may easily predict your financial performance in the medium & long term.
Control your investment
When you own rental property, you have complete control over your investment. You can choose who to let out your home and at what price. With a notice of a few days, you may ask your tenant to vacate your property in case you need your home to live in or to sell it.
Rental Income
Generating rental income is the biggest draw for owning rental property. No matter how your job or business is doing, you will have a stable income from another source every month. It provides financial stability in times of distress.
Property Appreciation
With real estate, you can rest assured that you will receive a handsome appreciation on your investment in the long term. While you keep getting rental income from your home, its value is also increasing parallelly.
Tax Benefits
There are tax benefits of owning rental property, too, if you buy it on a home loan. You can claim up to Rs 1.5 lacs p.a on the principal repayment amount and up to 2 lakhs on the interest portion of your home loan.
Profit earned on sale.
At any point in time, if you decide to sell your property, you can earn reasonable profits, if not huge. People always need homes to live in.
Rental Property Cons
Capital required
Even if you buy a property on a home loan, you need ready cash to make a down payment; this could be anything more than 10% of the total value of the property. Also, if you opt for a loan, you need to pay EMIs every month. So, ensure that the rental income you obtain every month must be more than the EMI you would pay. You need to have enough cash for any emergency.
Managing tenants
You must be adept at handling pesky tenants. Brace yourself to manage tenants who aren’t regular with payments. Many of them may damage your property or may carry out illegal activities.
Self-Management of property
Some owners of rental property like to manage their property on their own. The onus of repair and maintenance rests with you then. There could be costly & tedious repair requirements such as roof repair or tile replacement, etc. Also, the responsibility of evicting troublesome tenants would lie with you.
Property taxes
You would be required to pay property taxes if you own one. When you seek to own rental property, keep this in mind.
Property Maintenance
If you rent out your property, constant maintenance and repairs are required.
Rental Values may vary.
With time, depending on the changes in your neighborhood, your rental income may vary too. Better infrastructure, metro connectivity, and any other developments in your neighborhood may increase or decrease your rental income.
Owning a rental property may seem alluring, but this handy guide will help you make a sound decision.
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