If you have some surplus funds and are looking to invest in a property purely for generating rental income, your highest chances for success lie in educating yourself about the right opportunities and avoiding the wrong ones. Among many other things, you need to know how the different rental markets (read ‘cities’) are performing across the country, and how you can make your potential rental income grow faster than the market trends. But first, you need to understand how the rental property business works in the first place. A central concept here is rental yield.
In simple terms, rental yield is the ratio of annual rent of a property to the total cost of the property. For example, if your annual rental income is Rs. 1,20,000/- and the value of your house is Rs. 50 lakh, the rental yield will be 1,20,000/50,00,000, or 2.4%. Rental yields vary across the globe, but an average of 2% of rental yield is considered a good deal for residential properties in India.
The next ingredient in a successful rental income strategy is to be up to speed on which the cities to invest in are.
Best Cities For Rental Income Generation
In India, the cities which currently offer a higher rental yield are Mumbai, Pune, NCR-Delhi, Bengaluru, Kolkata, Chennai, Hyderabad, Ahmedabad. All these cities offer a rental yield of 2% and above, and you can be assured that the average is not going down anytime soon. Investing in these cities will offer you the maximum returns on investment in properties bought for generating rental income.
These cities do not rank high by pure chance – there are sound market fundamentals driving their strength as lucrative rental markets:
All the above-mentioned cities are driven by a lot of employment opportunities for both skilled and unskilled labour. In other words, inward migration in these cities happens not only from different cities, but also outlying towns and villages. This invariably results in higher demand for housing.
One defining aspect of most migrants into these cities is that they do not immediately want to invest in self-owned homes to live – often because they cannot immediately afford such an investment, but also because they are not sure whether they will actually want to continue living in the city over the long haul. This causes the very healthy demand for rental homes in these cities.
The supply of residential apartments in the primary workplace hubs of these cities is invariably lower than the demand. Both near the business districts as well as the peripheries, tenants are ready to pay higher rents for flats which allow them some degree of ease in the daily commute to and from work.
Realty Sector Pressures
In the past couple of years, despite various residential projects coming up in these cities, not enough have been sold. This has led to a lot of unsold inventory and a pressure on demand-supply equation, which eventually leads to higher rentals for a few properties on the block.
In terms of rental demand, no single type or size of property rules the roost. Since there is a shortage of space, all kinds of residential flats have potential tenants vying for them. This results in a very favourable equation for landlords.
However, to command a good rent from your property compared to other residential units on the market, there are certain vital guidelines to follow:
Rental income-producing properties are one of the safest forms of investments which can give you lifelong returns, and the simultaneously appreciate in capital value as well. It therefore makes sense to do your homework and ensure that you are investing in a property that works well on every front.
Authored by Ashwinder Raj Singh, CEO – Residential Services, JLL India
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