4) Understanding Income from Rental Property
There are two ways property owners tend to earn through property - capital growth and rental income growth. Mumbai has traditionally been viewed as a safe haven for residential property investment, offering exceptional capital appreciation with a average rental yields. Let's take a look at these in more detail.Capital Growth
When a property increases in value over time, it is known as 'capital growth'. Capital growth, also known as capital appreciation, has been unprecedented in recent times, but the value of property does go up as well as down, and of course the economy and local conditions surrounding the property have a big effect. Keeping a time frame of 10 years, you can safely expect a 12-15% growth in capital values for residential properties in Mumbai, on an annualized basis.
Rental Income
Rental income is what the tenant pays you - hopefully this will grow over time too, as it is linked to the capital value of the property. For residential properties, gross annual rental returns can be between 3%-6%.
If you add up the returns from residential renting, it can be anything between 15-21% per annum.
Pointers
Allow for empty periods Don't assume the property will always be occupied with a rent paying tenant. Budget for a month each year when the property will remain empty known as 'void period'. Focus on Net Annual Rental Income and not on Monthly Rental Income.
Case 1: If focus is on maximizing monthly rental value. Rent out price of the property at Rs. 60,000/- p.m. The property is expected to be rented out in 60 days.
Monthly Rental Rs. 60,000/-
Time vacant 60 days
Annual Gross Rental Income Rs. 60,000/- (p.m.) * 10 months = Rs. 6,00,000/-
Expenses incurred on property
Society Maintenance Rs. 4,000/-(p.m.) * 12 months = Rs. 48,000/-
Property Tax Rs. 2,000/-(p.m.) * 12 months = Rs. 24,000/-
Utilities (60 Days) Rs. 1,000/-(p.m.) * 2 months = Rs. 2,000/-
Maintenance/ Cleaning Rs. 3,000/- (p.m) * 2 months = Rs. 6,000/-
Total Annual expenses Rs. 80,000/-
Net Annual Rental Income (12 Months Period) Rs. 520,000/-
Case 2: If focus is on maximizing annual rental income. Rent out price of the property can be dropped to Rs. 55,000/- p.m. The property is expected to be rented out in 15 days
Monthly Rental Rs. 55,000/-
Time vacant 15 days
Annual Gross Rental Income Rs. 55,000/- (p.m.) * 11.5 months = Rs. 6,32,500/-
Expenses incurred on property
Society Maintenance Rs. 4,000/-(p.m.) * 12 months = Rs. 48,000/-
Property Tax Rs. 2,000/-(p.m.) * 12 months = Rs. 24,000/-
Utilities (15 Days) Rs. 1,500/-(p.m.) * 15 Days = Rs. 500/-
Cleaning Rs. 3,000/- (p.m) * 15 Days = Rs. 1,500/-
Total Annual expenses Rs. 74,000/-
Net Annual Rental Income Rs. 5,58,500/-
By reducing the monthly rental rate by Rs. 5000/- per month you have increased your Net annual rental income by Rs. 38,500/-
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