How to build up on rental income
SRIKALA BHASHYAM
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With yield from property slipping, it’s time for some investment strategies
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One of the significant fallouts of the recent correction in the property market has been the fall in rental income. The fall has been in the range of 20-30 per cent and in certain parts of urban cities it has been a challenge for landlords to find a tenant.
With tenants enjoying the comfort of excess supply, it has put pressure on the yield from property. What has compounded the problem is the uncertainty on the economic front, resulting in job losses.
As a result, the annualised returns from property which ranges around six per cent and goes up to 8-9 per cent in boom conditions has once again slipped to 4-5 per cent in many cases.
As it takes a while for the cycle to do a turnaround, property owners need to look at different avenues for boosting the returns from their property. Here are some tips.
Invest deposit money
Landlords still enjoy the luxury of collecting deposit money which ranges from 10 to 12 months. If the monthly rental is around Rs.10,000, a landlord can receive a minimum sum of Rs. 1.2 lakh as advance deposit. Rather than keeping the money in a savings or fixed deposit, look for different products.
For instance, if you have the luxury of 3-5 years for refunding the deposit, the advance rentals can be invested in MIPs or balanced funds of mutual funds.
While the latter carries the risk of equity exposure, it gets mitigated when the tenure is in the region of five years. MIPs have much lower exposure to equity, ranging from 10-20 per cent, and have the potential of earning double-digit returns.
Risk-free product
Now, one may ask how an investor can take liberty with deposit money which needs to be repaid on demand. Those who don’t have the back-up of deposit money can set aside the monthly income in entirety or a portion in a risk-free product. Debt funds or recurring deposits of banks can be some of the options.
For instance, if a property owner receives a monthly income of Rs. 10,000 and can set aside only Rs. 4,000 for investment, he can build a corpus of Rs. 48,000 in one year and in a matter of three years, he would have built a corpus in excess of the deposit (as per the above example).
In such a scenario, there would not be any pressure on the investment and on the other hand, the excess funds can be added to the balanced fund or MIP as the case may be.
Over a period of time, such exercise would help the property owner build a nice little corpus and would also help in boosting overall returns from his property.
The good news for a property owner is that even if he falls short of cash, he can avail loan facility based on rental income. This could be plan B for the refund deposit if the stock markets undergo deep correction.
While the investing strategy may not make a significant difference to the yield in the short term, it can make a substantial difference over a period of 7-10 years. Such corpus can be used to invest in a second property (as margin money) at a later date.
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