Investing in Real Estate for Rental Yield? Here’s what you need to know

Admin July 21, 2016, 14:14 PM Bengaluru Residential Report
Investing in Real Estate for Rental Yield? Here’s what you need to know

When you have surplus funds, one of the biggest investment option is real estate. Investing into commercial and residential property for rental yield is a common practice in India. Many people also invest to create a secondary source of income. Before getting into the details, here’s an explanation about what is rental yield.

“Rental yield essentially measures the return you make on the real estate property or asset without considering the expected capital gain or loss. The rental market is developed primarily in the metros where people from other states come and settle for work. For other smaller cities, rental markets are not that developed or uniform.”

Commercial properties are known to have better rental yield than residential but your real estate investment will obviously depend on how much you are able to afford. Commercial real estate is always more costly than the residential real estate. The proportion of land to cost is different when comparing the two types of real estate. Commercial real estate costs high for a comparable less area paid for, whereas it is vice versa for residential real estate. In other words, the ‘per sq. ft.’ cost of a commercial real estate is usually higher than that of residential real estate.

asset without considering the expected capital gain or loss

A few locations that tend to yield above average returns on rentals are locations which have lot of offices in their surrounding areas and hence people are ready to pay higher rent for the convenience. Also, these areas are expected to give good capital appreciation in future due to the higher demand in these areas and better rent prospects. Electronics City Phase II, Kalyan Nagar, Devanahalli, Begur Road and Kodichikkanahalli are a few areas in Bengaluru amongst the high rental yielding locations. These regions can attract approximately 4.58% to 5.89% year-on-year rental yield on the investment made.

Other reasons driving rental demand and creating high rental income is the easy connectivity, strategic location and the availability of basic facilities like renowned schools, hospitals, shopping malls, restaurants and banks to name a few, which makes life easy for the residents of that locality.

Property location, building condition, amenities and social infrastructure play a good role in increasing rental yield. The condition of a property is also very important with regards to rental yield because even in a high demand area, you’re not always guaranteed to have tenants. Here are a few quick points to consider while investing into a property for rental yield:

Research about the history of rental prices and property prices in the area. These are great indications when it comes to deciding if the area is good for property investment and also understanding by how much the rental yield will also increase in the years to come.

Compare residential and commercial yields in the area. Sometimes a particular area will have better rental yields in the commercial space, so it might make more sense to invest in commercial space rather than a residential space.

Do a survey of social infrastructure and connectivity for the area. Schools, companies, retail complexes and hospitals in the area increases rental demand. These will also help in charging a higher rent as proximity to the areas of business and social needs always commands as premium.

The history will let you know how much you need to pay in maintenance every year. If the construction quality is good then you don’t need to spend on infrastructural maintenance too often.

Financial back-up. If you want rental income to service a part of your loan then check the highest possible income from the area that is possible. Go with builders who provide amenities so that you can charge higher rentals for better quality of living.

Capital Market background. Check capital market appreciation in the area for the past 3 years. If you are looking to sell the property after a period of time then choose an area that has a potential of increasing its marketing capitalization significantly. Inner city areas do not appreciate at a good rate but developing areas have seen heaps of property appreciation.

These points should help you identify a property that fits the bill for property investment and income needs that you have. Rental yield should be calculated before making an investment and also the liability of the loan that you need to incur should also be factored before embarking on any real estate investment.

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