How To Maximize Residential Property Yields?

Rent yielding residential property investment has a good share in the portfolio of an active Indian investor. Younger investors have been actively evaluating this opportunity. Rental yields always range between 2.5 per cent to 3.5 per cent per annum. A broader picture of rental yields available in major metro cities in India can be estimated from the table below:

Exceptions to standard rental yield calculations may arise based on factors related to demand and supply for quality housing in new or emerging suburbs. The effective cost of a home after tabulating post-tax interest costs is approximately 5.12 per cent given the sops under sections 80C and 24 of the Income Tax Act.

An illustration depicting the calculation of post-tax interest cost:

In the case of a first-time home purchase, the cost can also come down approximately to 3 per cent p.a on account of subsidy provided through the Pradhan Mantri Awas Yojana (PMAY) and tax break on home loan interest. This is particularly relevant to an NRI who is living abroad and has let out his home on rent, so long as the project specifications honor the provisions of the PMAY. 

Now that the yield and cost of financing the asset are almost matching, the upside is earned through capital appreciation which can assure a compounded 10 per cent return over a 4-year period. From a Bangalore market perspective, prime examples are properties in Outer Ring Road, Hebbal, Hennur Road, Whitefield etc which have delivered a compounded capital appreciation of 15 per cent annually. 

Pune has emerged as a prime market where an investor can garner a compounded annual return in the early teens. Chennai and Hyderabad are yet to attain the status of prime rental yielding destinations. 

If you are looking at getting better yield on your residential property investment, consider pursuing simple and easy-to-implement investment strategies. An investor can enhance his yield by half a percentage if he expends an additional Rs 5 lakh in furnishing his residential property by sprucing up the interiors. It also makes smart economic sense to invest in a smaller 3 BHK unit than a larger 2 BHK since it provides the broader option of allowing say 3 bachelor friends to stay on rent, assuring better returns. 

By investing into properties located in well-maintained societies with reasonable amenities, higher maintenance outgo can be reduced. Associate it with reliable brokers who have a strong presence in the local area with reach to reliable tenants to ensure that residential units do not remain vacant for prolonged periods of time and start producing yields when they are ready to be occupied. 

It is also important to note that rental guarantee schemes should not be believed blindly. These schemes are generally devised as price plays by developers to push stock. It is only on rare occasions that one can buy properties with a pre-lease. 

Certain factors need to be taken into account while evaluating rental schemes. While renting out a property, it is highly advisable to check the antecedents of the lessee (tenant to whom the property is being leased). The most reliable lessee would be a corporate provided it is a reputed company. Service apartments take care of furnishing and offer chances of higher yield. 

Renting out to a family is also a viable option as there are lower hassles involved and they can be retained as tenants on a longer term basis. Individuals, bachelors and paying guests assure a higher yield though there is a relatively higher risk of lease break, delays and non-payment of dues and low upkeep of the property.   

As per current market norms, properties are leased for 11 months with a provision for extension and escalation. A longer tenure with a good and credible lessee ensures a potentially higher resale value. While deciding on the amount of deposit to be paid, the upfront deposit to be charged to reputed corporate can be reduced since there is a lower risk of non-payment of rentals. 

Rentals can be increased by gradually decreasing deposit amounts in key urban centres like Bangalore (10-month deposit), Chennai (6-10 months), Mumbai (6 months) and NCR/Kolkata/Hyderabad (3 months).  A thorough background check needs to be undertaken before a call is taken on deposits. 

It is extremely important to pitch the residential property to tenants at appropriate rental pricing points as it will ensure that vacancy intervals are kept to minimum and maintenance charges are paid for by the tenant. The right rental pricing can be estimated by considering cost of investment in the property and comparable rental returns in the micro market. Factors that largely influence the rental pricing are micro market demand supply, location, capital value of asset, comparable prices in the market and tenant profile.