The Hindu : Kerala News : Challenges in investment

Online edition of India's National Newspaper
Wednesday, Nov 21, 2007
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Kerala

Kerala

Challenges in investment

Property investment brings different kinds of challenges for different individuals. While some find it difficult to zero in on the location for their investment, for many others, who regularly bet on property, it is all about generating enough cash flow from their investments. With returns from rentals having come down drastically in recent years, managing property has turned out to be a tough challenge.

Thanks to the increasing product innovation in the banking sector, loan against rentals has become an attractive option for many in recent years.

In this case, a property owner can put his rental income into better use by borrowing against the rental income generated by his property.

How does it work?

Typically, when a banker lends loan against property, he takes into account the repaying capabilities of a borrower. When an owner is sitting on a property with a good rental income, his annual income becomes secondary as the bank would be lending against the rental generating capabilities of the property.

Besides rentals, the bank will also take into account the value of the property while fixing the loan amount. For instance, if a property generates an annual rental of Rs. 25 lakh, the bank would be willing to provide a loan to the tune of Rs. 2 crore.

Servicing

The servicing of loan would be similar to the escrow account mechanism wherein there would be a tripartite agreement between property owner, tenant and bank.

The tenant would be required to deposit the rentals in a bank account and there would be a lien on the same.

Suitability

The loan against rental would be ideal for those who have large rental income from their property. Generally, rentals tend to be higher in the case of commercial property and in tier I and tier II cities the landlords have the luxury of letting out their property to large corporates. Bankers say the concept is a big hit with those who have let out their property to large tech and retail companies.

End use?

The next question is why should property owners resort to borrowing against their rental incomes?

Luckily, banks don’t insist on the end use of such loans unlike other loans such as home loans. One of the avenues for such loans can be investment in another property.

The loan raised through such a scheme can be used as margin money for investing in another product. In addition, other traditional expenses such as children’s education or marriage can be taken care of through such borrowing.

Interest rate

The biggest worry with respect to a loan is interest rate and the good news is that banks don’t charge differential rate of interest with this product and according to bankers, it hovers around 11-13 per cent, similar to home loans. The option is also available to NRIs who have property which has enough cash flow.

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