With Indian property prices remaining high in the big cities, buying their own home remains out of sight for many people with average earnings. The high demand for rental property in Indian cities such as Delhi and Mumbai therefore represents a good opportunity for investment. However, becoming a landlord is not a decision to be taken lightly; with the financial gains comes responsibility, as well as costs beyond that of purchasing and renovating the property. Anyone considering entry to the buy-to-let arena should carefully weigh up whether they can afford the additional financial input that will be required to maintain the property for the purpose of rental.
Insure your property
As much as you might like to think that everything will go smoothly once you have bought property and have tenants living there, it pays to anticipate the worst will happen, as none of us can know what the future might hold. Insuring your property against the event of extreme weather or a natural disaster such as flooding, a cyclone or an earthquake provides protection against your investment; without this you could lose all the finances that you put into the property. After all, with climate change, unpredictable and devastating weather is more likely to occur. However, it isn’t just the elements that you have to worry about; tenants may accidentally or deliberately cause damage to the building or its contents – particularly an issue if you have provided a furnished property and electrical appliances. The cost of repairing one item may not seem significant, but if you have a portfolio of multiple properties, the cost to fix or replace these can soon mount up. Appliances additionally break down by themselves periodically and if you have provided these, it is your responsibility to arrange and pay for their repair; if you don’t have the means within your own pockets to do so, your tenants won’t be happy and if repeated may look elsewhere for their rental. However, you aren’t obliged to take out insurance for their possessions; that is your tenants’ responsibility.
Fees for letting agents
While you may feel confident that you can secure tenants for your property by your own means, whether that is through word of mouth or your own advertising, if you want to rent your property as soon as possible, using the services of a letting agent is the best way to achieve this. However, these services come at a price. Whether they simply find tenants for you or take a more active role in the day to day management, their price will reflect this. It will be up to you to decide how involved you want them to be – if you have a busy schedule this might be very welcome – but bear in mind the more input they have, the higher their fee. Expect to pay between 10 and 15% of your rental income towards their services.
Perks for your tenants
While purchasing furniture and paying for the utilities is an additional expense, this can be a wise move. Your property will be more attractive to tenants who don’t want the inconvenience and financial outlay of having to buy bulky items of furniture, for which they will then have to arrange removal when they move elsewhere. Equally those tenants who do not wish to take responsibility for arranging utility providers and then settling the payment each time a bill comes through, will look favourably on property where the rent is inclusive of bills. Not only will you be able to secure such tenants more easily when your property has this to offer, but the rent you charge will reflect this, potentially offering you a better return on your investment. However, the rent on your property must still be competitively priced, or they will take their business elsewhere.
Don’t forget tax
The amount of rental income you have coming in each month might be attractive, but don’t forget you won’t see the benefit of it all; tax will be deducted. For each property you own beyond the one that you live in, you will be taxed based on its earning potential; even for the months you have no tenants living there, it will still be taxed, providing an incentive to make sure it is occupied or you could soon find yourself losing rather than making money. However, you are entitled to a 30% tax deduction to cover the costs of maintenance and repairs, even if you have not actually spent this amount during the tax year. A second smaller tax deduction is also available for properties purchased with a mortgage to cover the interest on payments. When you eventually sell the property you will then have to pay capital gains tax on the profit you have made on the sale – assuming it is worth more than when you purchased it.
As long as you are aware of the financial commitments that buy-to-let property investment brings with it, this offers an alternative opportunity to add to your savings for the future.