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Wednesday, February 5, 2014

How to improve rental yields

How to improve rental yields

Even a smaller property at a good location and proper maintainence helps
Arnav Pandya  
Real estate prices constantly move up and down due to changing economic conditions. But there is this certainty that people and businesses will always need a roof over their heads. And this means that individuals can always boost total earnings from a property by hiring it out.

Rents may not be that high for household property as prices of assets have risen considerably. So rental yields are working out to around two-three per cent, but commercial yields are around six-seven per cent, which helps generate income from real estate.

Nature of rental yield
One of the main questions for an individual is the manner in which returns on house property are to be calculated. Returns are through rent and capital appreciation on sale of the property. The rental part is calculated using yield, which is the amount of rental income from the property divided by its cost. This indicates the rate of return actually earned through rent. This figure is utilised to compare against other investment options. As a deposit offers interest or a share, dividend and capital appreciation, rental yield would have to be compared with interest or dividend in order to arrive at a proper calculation of regular returns. For total returns, capital appreciation has to be added to arrive at the final figure.

Factors affecting yield
The term rental yield indicates the two chief factors that impact yield for an individual. One is the actual income earned on the investment. This means that higher rent would push yield up. A more important aspect is the price of the property when purchased. Take two cases in the same complex. In one, an individual bought a property for Rs 1 crore and charges Rs 20,000 a month in rent. This would imply Rs 2.4 lakh a year which puts the property yield at 2.4 per cent. In the same complex a property bought several years earlier at Rs 48 lakh, a similar rent would yield a 5 per cent return. This factor impacts yield to an individual.

The Indian situation
One has to look at the prevailing Indian situation and various reports released across the world. The position of the country is low in terms of rental yields on residential property. A recent report by a global real estate consultancy firm put the average rental yield in Indian Tier-1 cities quite low, with Delhi around 2 per cent and Mumbai around 3.5 per cent. Another report put the average for the country at around 2.4 per cent, lower than in developed as well as developing countries of the world. This shows the kind of return expected from rent, though the real benefit of holding property in India is through a rise in its capital value, leading to appreciation in prices.

Several factors impact yield. Hence, an individual would have to consider these in detail when deciding about a property. Some of these factors are:

Property location and position
One of the key factors that influence yield and return is location. This not only includes the area where the property is located but also the kind of infrastructure around the property. In several cases, property with a view would command better rent than one where buildings block the view. In other cases, the convenience of being on a certain floor would turn out to be an advantage. These have to be considered carefully at the time of purchase of a property as they would play a crucial role in the overall returns calculation.

Internal upkeep
It is important to ensure internal upkeep of the property. This would mean that if the floor has chipped tiles and the walls have peeling paint the position on the rental front would be slightly worse than where maintenance is good. This is important so that there is a clear effort to ensure that maintenance is carried out well and that this is appealing to those who want to rent the property.

Smaller facilities
It might not seem important for an individual when smaller facilities are considered but these can play an important role in terms of the convenience to the user of the property. This would include things like space for specific activities, child-friendly conditions and so on. These ensure that the yield can be slightly higher than what would normally be the case. It is vital that attention is paid to these facilities, which have actual utilitarian value for someone looking to rent the place

Amenities in a complex
There are some other factors like amenities in a complex where the property is located. If this includes a gym, a pool, a garden, adequate parking, etc., the rent could climb, since these facilities provide added convenience to the one renting the place. Also facilities like security, round-the-clock water supply are significant.

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