What you should look-out for in a property for rent
On the basis of back-of-the-envelope calculations of rental income a lot of property is bought. And many of the assumptions they use are not realistic. Make sure you do not make the same mistakes if you are also planning to buy property to rent out,.
The first false assumption is that the property will earn rent throughout the year. The bad or ineffective calculation can go awry if you are not able to find a trustworthy tenant. This is especially true if the property is in a far away and sparsely occupied locality. You might also have to spend 15-30 days’ rent as brokerage if you find a tenant through an estate agent.
For earning an attractive rental return, buy the apartment in a service or manufacturing hub. “You may buy the apartment at some distance from the employment hub, but it should be well-connected. You may then get the flat at a lower price and be able to earn a higher yield of 6-7%,” said Ashutosh Limaye, head, research & REIS, JLL India.
Another useless assumption is that the rent received will be net return. Rental income is eligible for a 30% deduction but the balance 70% is added to the income of the owner and taxed as normal income. As long as you are in the highest 30% tax bracket and earn Rs 20,000 as rent from your property, the post-tax income will be only Rs 15,634 a month.
It’s a too easier if you have taken a loan, because under Section 24b, the interest paid on the loan can be deducted from your total income. It is going to bring down the cost of the loan. Here again, keep in mind that the interest portion of the EMI keeps coming down every month. So, the tax benefit will decrease down with every passing year.