WHAT IT TAKES TO BE A LANDLORD- Amit Shanbaug

It’s easy to buy property with a loan and use rental income to pay the EMI, but dealing with tenants and maintenance issues can be a problem. Find out what you should know before renting your house
Amit Shanbaug


The two-bedroom flat in the multi-storeyed complex at Vasundhara Enclave near the Delhi-Noida border is in a mess. The flooring has cracked, the pipes are leaking and the woodwork is in a bad shape. Still, Noidabased businessman Sudhir Makhija is interested in buying it. It’s because he wants to invest in property for rental income. Makhija estimates he will have to spend another 2 lakh to do up the house before he can find a tenant. “The high rental value of the locality will more than make up for the expense,” he chuckles.
There are many buyers like Makhija whose sole intention is to put up the property on rent. In fact, according to an online survey conducted by ET Wealth, the age of such investors is coming down, with almost 90% of the respondents being less than 45 years of age.
This unabashed focus on rent has many positives. Inflation is rent-friendly. Rents go up with inflation, while the home loan EMI for the property remains more or less steady. And, while the property earns a regular income for the owner, it continues to appreciate in value.
However, renting out property may not be everyone’s cup of tea. “My business gives me the flexibility to manage my five properties. Someone with a full-time job will find this difficult to handle,” says Makhija. Dealing with tenants can also be a nightmare. Besides the usual shenanigans over delay in rent, there is the fear of a tenant not vacating the property. This is why Mumbai-based Ravi Tiwari, who owns two properties, says, “I change my tenants every 2-3 years.” It means shelling out more to a property dealer, who finds a tenant for him, but Tiwari doesn’t mind. “If a tenant stays for long, he may refuse to vacate,” he says.
These are just two of the issues that can crop up. There are other aspects like income tax, wealth tax, the real cost of loan taken for the property and the soft skills required of a landlord. Here’s what you need to consider before you decide to wear the hat of a landlord.
LOCATION AND SIZE
If you want good rental income, buy a property that boasts a good location. It makes sense because what tenants spend extra on rent, they can save in transportation and in time.
The ideal neighbourhood should have a built-in tenant base. This can be a commercial or an institutional hub in close proximity, which will ensure a steady supply of working professionals and their families.
The smaller the property, the better is the rental yield. This is because the tenant base gets bigger as we move down the income pyramid. In Mumbai, smaller flats are more in demand as they are affordable for a larger number of people. They generally compare the rent with the EMI payout in case they own the house.
TAX IMPLICATIONS
If you own more than one house, the second house is deemed to be rented out and you are taxed for the notional rent received from the property. According to Sanjay Kapadia, chairman, Taxsum.com, this rent is calculated by accounting the municipal valuation and the fair rent of the property. If, however, a property is covered by the Rent Control Act, then the amount of rent expected cannot exceed the standard rent determined under that Act.
The good news is that the rent from the second home is not fully taxable. There is a 30% standard deduction. Besides, the interest paid on a home loan and municipal taxes paid can also be deducted from the income. Unlike in a self-occupied house, there is no annual limit for the home loan interest you can claim as a deduction. Some of these rules will change when the Direct Taxes Code comes into effect next year. Also, if a property has been given on rent, it is not taken into account while calculating wealth tax. But if it is lying vacant, its value is included while calculating the tax.
THE LAW & THE TENANT
A residential lease agreement is a legally binding contract between the landlord and all cotenants. Once an agreement is signed, it can’t be unilaterally changed by one party. It is, therefore, important for a landlord to ensure that this lease agreement is watertight.
SMART STRATEGIES TO FOLLOW
Mind the other costs: While sizing up a property, don’t just look at the potential rental income. Factor in other costs, such as maintenance charges, property tax and payment to the broker who gets the tenant. Also, keep in mind that there may be a gap of 1-2 months between two tenancies.
Think downmarket: Some of the properties most wanted by tenants may not be in upmarket locations but in downmarket areas. Locations close to colleges or work places or with direct access to public transport, but in a notso-prime location, will always be in demand for their lower rentals.
Additional facilities: New projects in suburbs offer facilities such as clubs and swimming pools. Most tenants don’t like to pay for common facilities they hardly use. Avoid buying such properties.
Stay clear of oversupply: Don’t buy a rental property in areas where many projects are coming up as the new supply may lower rentals. If the property prices are affordable, tenants may prefer to buy instead of rent.
Resale properties offer better rentals: Resale (or old) properties score over new as they are ready for possession and will most likely be in a more central location than a new one. The drawback, however, is that not everyone will be able to afford the high upfront payment sometimes required for a resale property.
Renovate sensibly: When you renovate to rent out a property, don’t go over the top. Stick to basic renovation, such as fixing electricity connections, checking the sanitaryware, polishing the woodwork and painting the house.
Don’t buy outside city or state: The farther you live from your rental property, the harder it will be to monitor it. Collecting rent or taking care of maintenance will be more difficult and costly if you live in another city.
Have a contract: It is always better to have the terms and conditions on which you lease out your property put down on paper. Also, review the contract when you renew a tenant. Collect rent on schedule: Being consistent with your tenants is imperative. If you are too lax one month, you may have a hard time collecting rent the next month.
EVICTING A TENANT
Sometimes evicting the tenant is the only feasible option. If you cannot get the tenant to pay or obey rules, it may be time to start the eviction process. The rules for evicting a tenant vary between states. It is, therefore, imperative you discuss your options with a lawyer. For security, you may want to conduct the eviction through your lawyer. Send all your requests in writing. The first step is to send a written notice for the tenant to pay rent, fix problem behaviour or move out. If the problem is not rectified despite the notices, file a suit. If you win this, the law enforcement personnel deliver the written notice, when the tenant may remove his items from the premises.
Read the full story in ET Wealth
(Sep 12-18 issue) or log on to
www.wealth.economictimes.com


Kiran Shetty
Owns a 1-& a 3.5-BHK house in Mumbai.
HIS STRATEGY: Let out a property only after it is debt-free. Shetty plans to rent his loan-free 1-BHK house to take care of the partial EMI for his bigger house. As the 1-BHK house is located at a prime location, he expects a hefty rental. He purchased the bigger house for 1.35 crore around a year ago. Of the total sum, about 45 lakh came from home loan, the rest from his savings. THE PROBLEM: Though his house is situated in a prime location, he would still need to renovate the 1-BHK house and bear the cost to attract good customers.



Ravi Tiwari
He owns two 2-BHK flats in Navi Mumbai and Thane.
HIS STRATEGY: Lease out one flat to pay the loan taken for the other house. When he purchased his second flat in Navi Mumbai, he leased out his earlier flat in Thane, which was in a better location, to reduce his loan burden as it fetched him a higher rent. THE PROBLEM: He is unable to visit Thane regularly and misses out on paying monthly maintenance bills, water charges and property taxes and ends up paying 300-400 as fines. He plans to pay the entire year’s maintenance in advance.