Creating a second income is always a good idea and even Warren Buffet once said “Never depend on one source of income”. Second income is also necessary for a decent and comfortable Retirement which is another concern for all and especially those who are not covered by retirement benefit schemes. Rental income is one such avenue.
One of the biggest charms of buying a property is to generate a rental income. Sounds good, buy a house and rent it out!! And thing which cannot be ignored is that Indians love to invest in something which has a physical presence may it be gold or property.
But is rental income a good idea? Is it wise to depend solely on rental income for above mentioned needs? In this article, we will discuss all the pros and cons of buying a property for rental income.
Lets’ look at the advantages first
- Capital gains along with rental income:
Along with rental income one can also expect appreciation in property’s value over a period of time
- Less volatile than any other asset class
If we look at shares and even gold, they are volatile but property for that matter is comparatively less volatile But there is a misconception that property prices never go down, which is not true. Even today, there are various pockets of real estate which are down as property market has gone in bubble ozone. But for long term it is not a bad option.
- Tax benefit on Home Loan
Interest and Principal on home loan are eligible for deduction u/s 24 and 80C of the Income Tax act respectively. However interest deduction in case of Self Occupied Property is subject to maximum limit of Rs.1, 50,000 but entire interest is deductible in case of property is given on rent.
But the world is not so rosy always. There are certain areas where property bought solely for rental purpose has back fired the investors badly.
- Uncertainty in Rental Income
There are times when property remains vacant and owner finds difficult to get regular income out of it. If rental income drops, it may seriously hamper ones financial planning and can give sleepless nights.
- Low Rental Yields
We have been continuously saying that property market could be headed for a bad time and one of the reasons for this is very low rental yield. Currently the rental yields are close to 2% as far as residential property is concerned and 4-6% in case of commercial property. But getting a rental from commercial is not very easy.
- High Interest Rates
The interest rates are at highs and mostly all loans nowadays are on floating rate basis. Imagine a situation where rent remains same but interest outgo on loan for property goes up. So buying a property for rental would not be sensible if you don’t have a regular income to support the EMIs
- Low Liquidity
Real estate is less liquid as compared to other assets such as FD, gold etc. So buying a property for your daughter’s wedding or retirement or making a huge investment during working years may not be a sensible option. Also it is not possible to partially withdraw from real estate as it can be done in other assets.
After looking at the pros and cons, you must plan keeping in mind your financial position and not what others are doing. Also keep the below-mentioned points in mind before you buy a property for rental income.
- Additional bathroom and decent parking area attractive features and better rent can be expected.
- Vicinity to schools, colleges, shopping area
- Basic amenities like geyser, electrical fittings has a low cost but a high impact on tenants mind set
- Don’t go for just traditional way of working. One can look at studio apartments, retirement homes, etc for higher rental income.
- Know the maintenance cost before buying flats for rental purpose
At the end, we would only say that rental income is a good source of second income but do not go overboard on the same.