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What makes rental property investment good?

A good rental property investment has multiple advantages. Real estate property in one asset that generates the most reliable income. Hence it is classified as the best asset.

On one hand, good property investment generates rental income, but on other hand this investment is also tax effective. No wonder why rental property investment is so popular.

If one holds a good property for long term, capital appreciation (profitability) is excellent. But not many investors are calculation-savvy. They do not know how to calculate the profitability of property investment.

The procedure becomes even more cumbersome if returns are earned in both forms: (a) capital appreciation & (b) rental income. In such cases how one can calculate the profitability of ones investment?

Profitability is a key in property investment. Profitability factor makes property investment such an awesome prospect.

Property generates passive income in form of monthly rent. It generates decent capital appreciation in long term. It can save income tax for buyers who opted for financing by home loan.

Home loan also makes the rental property investment a preferred option. Compared to other types of loans, home loan is the cheapest.

These are overall benefits of any real estate property investment. But there are loads of example where people could not make even decent returns from their property investment. What is the reason?

Returns from property investment depends on quality and location of the property. A good property at bad location will fetch low returns. A bad property at prime location will again fetch low returns.

A combination of ‘quality of property’ and ‘location of property’ is essential to generate high returns.

I suggest my readers to invest in real estate property for rental income. Become satisfied by giving priority to to rental income!

People investing in real estate property for capital appreciation is more likely to face disappointment.

Why it is so?

Rental income is assured return. Rental income comes in the hands of investor every month. Nothing is left for assumption.

Whereas capital appreciation is only a hypothetical gain. Till one sells the property, capital appreciation is only an assumption.

YIELD makes a rental property investment good.

How to identify a ‘perfect’ investment? Real estate property investment always has 2 sided cash-flow. One will be the cash-in in form of rental income. Other will be cash-out in form of EMI payout.

When Cash-in is equal to cash-out it is a ‘perfect’ investment.

Rental investment is perfect when rental yield is 100%.

What Makes Good Rental Property Investment

But this will not happen all the time. Out of all, 99% property investment will never satisfy the above equation.

Ones target should be to buy a property whose rental yield is 100%. But if it is not possible to locate such property, then the minimum yield that shall be acceptable is 40%.

This is what we can call as a ‘bargain’ investment

What it means when rental yield is 100%? In this case EMI payment will be equal to rental income.

What it means when rental yield is 40%? In this case, 40% of EMI payment will equal to rental income.

Yield of 40%+ makes a rental property investment very likeable.

In order to boost the rental yield, one must lower the cost of purchase of property. Higher will be the cost of purchase, lower will be the yield.

If purchase price of property is small, at the time of reselling profits can be even higher (due to capital appreciation).

So, cost at which a property is purchased not only betters rental yield buy also the capital appreciation.

Finding a bargain property is not a miracle. Such properties can be identified by good research and information gathering.

These days internet greatly facilitates us is locating bargain property.

One can find many ads related to rental property investment. In websites like 99acres, makaan, magicbricks etc, good property research is possible.

Rental Property Investment

LOCATION makes a rental property investment good

Buys a property in the most beautiful country, but select a poor location location and its yield will be low.

So why not everyone start buying houses in hearth of London?

Practically it is very hard to identify a property which is in prime location and and is also yielding high rent. The reason being, at price locations, cost of property is very high.

Example 1:

Students and bachelors favor small apartment. If small apartments are located in IT parks, university etc it will yield higher rental income. But it is also true that cost of purchase of such property will also be high.

To find a balance between cost and rental yield (40%) is a challenge. But it is also a fact the, in order for rental yield to be higher, prime-location is a MUST factor.

Example 2: Medium size apartments with 2 bedrooms attracts young to middle-aged tenants.

Couples with small children prefer such apartments. If such apartments are in close proximity to schools, shopping malls and multiplexes, it will yield high rental income.

PROXIMITY makes a rental property investment good

Rented property is one in which owner doesn’t self-occupy it. Hence the management of such property is done remotely. If the rented property is far away from the owner, management becomes difficult.

Owner’s proximity to the rented property is critical. Closer is the owner to the rented property, better will be the management.

As an owner, it is better to occasionally visit the rented property & meet the tennent. If the owners lives just minutes away, no problem. But if the owner is not in close proximity, visits will be rare.

Therefore it is better to look to buy a rental property closer to one’s own residence.

Avoid investing in different city no matter how lucrative is the investment.

AGE makes a rental property investment good

An aged property can quickly become a money pit. If roof of house is in poor condition, it will require expensive repair work.

Be ready to face extra cost again if old electrical installation of house needs revamping.

One must go for an aged property only if its healthy. Otherwise better will be to buy a comparatively newer property.

Aged property also find it difficult to get tennents. Buy property in good location and maintain it well. This will negate the age factor.

SIZE makes a rental property investment good

People prefer a bigger house for self-accommodation.. In this case people may even compromise on the location of the property.

It is common for people to buy house for self-accommodation at city outskirts. The reason why it is done is, bigger size house is available at affordable price in outskirts.

But this objective holds good for rental property investment?

Earn higher yields by investing in smaller size properties.

Look at per square feet price of properties. You will note that smaller houses are more expensive. Surprised?

Yes, smaller homes are like fast selling items. More people can afford smaller houses. In places like Mumbai, Bangalore, New Delhi; 1BHK apartments are sold at rates of Rs.15,000-Rs.7000/sqft.

Smaller properties requires less capital to acquire. Hence their demand is also more. As demand is more, rental yield and capital appreciation is also faster.

Size of a property is not only a matter of surface area. Number of rooms also plays a major role. This is one reason why, these days builders are selling 2-1/2 BHK apartments in place of 2 BHK. Providing more rooms in the same area can provide higher rental yield.

Conclusion

Rental income grows with time. On an average, rate of rental income growth almost beats inflation.

When ones buys a rental property, in general, the rental yield will be less than 40% per annum (see above formula). But with passage of time, this rental yield will improve.

It means, with time the rental yield improves. In first year, rental yield will be say 40%. The second year rental yield will be say 45%. Third year the rental yield will be say 48%.

This way, the rental yield will keep growing with time. A stage will come when rental yield will become as high as 100%. At this stage rental income will be equal to the home loan EMI.


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Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.

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