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Property watch: The good thing about rentals are that they are pretty much assured and don’t have the risk of coming down.
An investment in a second property is often driven by the need for a better cash flow.
Till recently, property owners could earn higher income by simply letting out. Not any more as property prices have grown at a scorching pace in the last 3-4 years.
Since rentals have failed to keep pace with the rising property prices, it has become necessary for property owners to use alternate options.
Last week, in these columns, we discussed about how additional income could be earned by investing the rental deposit money.
This week, we will look at how, rentals itself can be invested to improve better returns.
Put rentals to good use
Not all property owners need to use up the rental income for their living. For some, this could well be additional income. In such a scenario, the rentals can be used for earning higher income.
The good thing about rentals are that they are pretty much assured and don’t have the risk of coming down.
Instead, rentals generally go up over a period of time and keep pace with inflation. In fact, rentals are one of the key indicators of inflation in an economy.
One of the best options to make rental income work for you is to invest the same on a regular basis.
Earlier, recurring deposit (RD) was one of the options. It made a good sense a decade ago because banks offered 12-15% on such deposits.
The steady fall in interest rates has taken the sheen out of recurring deposits and instead, SIPs (systematic investment planning) through mutual funds have become a better choice. By using the SIP option, investor can also create a corpus which can be used for returning the deposit money. For instance, if a property owner rents out his property for Rs 10,000, he can create an SIP for similar amount.
Assuming that he has let out the property for a minimum of three years after collecting deposit money of Rs 1 lakh (10 months of rental income), he would be creating a corpus of around Rs 4-5 lakhs by investing in an equity fund.
If you are wondering how such a corpus be created with a saving of Rs 3.6 lakhs, here is the answer.
Equity funds
When an SIP of Rs 10,000 is created, the investor’s contribution over a period of 3 years, works out to Rs 3.6 lakhs.
As you are aware, equity funds in the last 4 years have been on a roll thanks to the bullish market conditions.
The average returns in the last 4-5 years have been in excess of 20% but even on a conservative basis, one can assume equity funds to generate annual returns of 15%.
In fact, equity markets generally tend to generate such returns in the long run.
When a property owner uses his rental income for investing in SIP, he can also take care of his cash need which could arise when a tenant decides to vacate the place.
However, SIPs are ideal only when the investor commits to invest for a minimum period of 3 years. This may not be ideal for those who would like to invest for a short term period of less than one year because equity is always risky in the short term but can provide good returns over a longer period of time.
SRIKALA BHASHYAM
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Property Plus
Coimbatore
