Lets face it. If you are a real investor investor you are in it for making money. If you want to reach that goal it all starts with buying the right property – which can be tricky if you just starting out in the game. Read this article carefully if you are a just starting in the business of real estate investing.
First of all before you buy take some time to find out what type of rental property you want, make a thorough business plan including rentals that you will receive from your property / properties and scout for good locations where you want to buy property. This homework or groundwork whatever you choose to call it will have to be done by you in order to select a property that meets all your specific requirements and possesses all the features that most tenants would want like quick access to arterial roads / metro / rail / bus stations and plenty of conveniences, educations and entertainment options nearby.
What Type of Property to Buy
Traditionally most real estate investors would buy single-family homes which has formed the largest chunk of the residential real estate market in India. But single-family homes comprising of 1, 2, 3 and 4 BHK apartments, duplexes and penthouses are not the only nor necessarily the best choice of investment for a first-time landlord.
Multi Family vs. Single Family
You could decide in the initial phases of your research whether to invest in single-family or multi-family properties. As the name suggests, single-family units are a single apartment meant for a single family and will get one rental income from each unit. Multi-family properties consist of buying an entire building consisting of multiple apartments for multiple families. Both set of investments have their benefits and drawbacks. But both types of investments are good choices for rental income.
The benefits of buying a single apartment is that its easier to get financing, requires less maintenance, no problems with tenants and it is easier to sell whenever you decide to dispose off the property.
Multi-family units on the other hand have some advantages too. You can consolidate your expenses because all the amenities of the building are under one roof. They can be easier to manage if you have a property manager looking after the properties. It can also be difficult to get financing for buying a multi-family unit but if you can make a considerable down payment and have a good credit score you can override this hurdle easily. If you main goal is to maximize your cash flow then having a multi-family property can be a veritable cash cow because your income stream will be that much stronger.
Bungalow vs. Apartment
If you are wondering whether to buy a bungalow / row house vs. buying an apartment you should weigh the pros and cons of each type of property. Apartments are good to start out with as a real estate investor because you will only have to take care of the internal maintenance of the property such as repairs etc. and the management of the apartment complex will take care of everything else such as maintenance of the building, trash pickup, landscaping, rain water harvesting etc. etc. Apartments will bring in less rent and returns will be far lesser if and when you decide sell it in the future. Apartments will also be less likely to attract long term tenants. Usually apartments are rented by bachelors, new couples and a younger crowd who are usually drifting between jobs and careers. This crowd is more likely to change between jobs and move between cities or countries leading to shorter rent agreements. A lot of this crowd could also be behind on rent payments thus creating blockages in your cash flow and accounting.
Row Houses, Bungalows and Villas will usually attract larger families with larger number of individuals living in the family. These families tend to stay for longer periods of time especially if they have school-going children. These families are also financially stable thus making them better tenants. Rents are usually always on time. The cons of buying a bungalow or a villa is obviously the higher cost which translates into bigger down payments, loans, interest payments and closing fees. Properties such as these also require more upkeep and maintenance than apartments because you are responsible for the entire property in and out.
You can pick the best property in a nice building with great views and plenty of carpet area and lots of car parking. But it will not matter if you cannot get good rental yields out of it to cover your loan EMIs and also leave you with some profit at the end of the day.
Below are some common reasons why a property can be difficult to rent:
- Lots of competition in the form of vacant apartments nearby can force you to lower the rent in order to find tenants.
- The wrong kind of property for your target tenant. An expat or a corporate executive will not live in a crummy part of town. Similarly struggling actors and bachelors will find it difficult to pay high rent in a neighborhood where plenty of cheaper options are available.
- A high or growing number of vacancies in the area where your property lies. This could be because of the availability of better quality apartments and options in a new apartment complex created nearby.
The amount of rent you can charge for your property will be determined by the area. The rent you receive should be enough to cover most of your expenses in order to make the investment worthwhile. If the average local rent does not meet your goals then you should make an effort to find a property elsewhere where rent returns are high. You should also find out how high your outgoing expenses are if you are buying an apartment in a building with a lot of amenities such as swimming pools, gyms, yoga rooms, banquet halls etc. All these costs add up to a considerable amount. In India these costs are shelled out by the property owners and not the tenants. Do remember that these outgoing costs which also include property taxes are ever-increasing. You should ensure that your rent and yearly rent increments keep up with your rising expenses as a landlord.
Know the Neighbourhood
If you want to attract quality tenants who have the ability to pay more and have a near-zero vacancy rate then you must find a property in a high-quality and fancy neighbourhood preferably with excellent views of a lake, sea, river or gardens. The quality of the neighbourhood will also dictate the kind of tenants you get. For example if you buy property in Pune or Manipal, your property will attract a lot of the student population which means a high turnover. Similarly even within a particular city there are enclaves that attract a certain kind of crowd and tenants. For e.g. Bandra with it’s charming bylanes and world-class restaurants and nightlife attracts a hip and glitzy crowd which includes corporate executives, young investment bankers and expats who love the quality of life in the suburb and are willing to pay more than market rates for a good sea facing apartment or otherwise. Santacruz and Vile Parle with it’s abundance of educational institutes attracts a large student population who rent out apartments near the colleges. Andheri West is an established film and television hub and attracts all sorts of people – from struggling artists to established actors, producers and showbiz personalities to businessmen and corporate execs. Areas around BKC, Powai and Andheri East on the other hand attract mid and senior level corporate executives who work in the business districts and the many office buildings that abound in those areas.
If you are looking to buy in certain upmarket areas of a city, it is a given that prices of properties will cost more in such places. That should be fine as long as your property can generate enough rent to support the high cost of acquisition of such properties. When you are in the initial stages of deciding where to buy your rental property make sure that you take a look at all the cost factors and ensure that the rising costs do not outpace your rental income.
Property taxes can vary widely from one area to another in any city. But one thing is for sure – they will increase every year! Property tax in Mumbai is based on the ready reckoner value that is used to calculate stamp duty by the revenue department along with the total carpet area, building type and age of building. So if the ready reckoner value of your property is high then property taxes can severely eat into your rent income. This is the final factor to consider when you are choosing an area to invest in.
We hope we have shed some light into the points that you must consider before you think about investing in property. Do your research well and you can soon be the proud owner of a high-rent yielding property that is never short of tenants!