Benefits of Investing in Property

Investing in Property

Having a roof over one’s head is important for everyone, and given the spiraling property prices, its becoming unaffordable for common man to buy a house. However, people find alternatives such as buying a flat or relocating to a suburb to achieve the dream of owning a home. Its important to generate income or funds out of a property so that the investment is justified and worthwhile. Investing in property is like any other investment, it can be a long-term endeavor, or an intended short-term investment. The goal is to generate profit and maximize returns.

Generating cash flows or money is important because the capital outlay is huge and most people borrow millions of rupees from a bank or financial institution to acquire a property.

Benefits of Investing in Property

  • Regular Income
  • Capital Appreciation

I’m assuming this to be a property which is not used for personal dwelling. In case of a self-occupied property you can have benefits that include:-

  • Rental Savings (comparative market rents for similar accommodation)
  • Safety/Roof over head: Irrespective of economic turns you have a place to live
  • Option to generate income/funds

Although the options appear limited, there are several avenues to generate income or funds, which we shall discuss in detail.

Investing in Property – Income Options

There are several options to generate income from your property:-

1. Residential Renting

This is the typical option most home owners prefer due to its simplicity. You give your property on rent to an individual or a family and collect regular rents and a security deposit. The income might seem pretty insignificant but overtime this could be another significant source of income.

For instance the rent for a Rs.25 lakh flat would be Rs 7,000 pm (Rs.84,000 p.a) in the initial stages, which works out to a yield of 3.36% p.a. However, when the rents gradually move up to Rs. 10,000 say in next 2 years, the yield would become 4.80%. Once it crosses 5% mark, it is as good as an Annuity or Fixed Deposit providing stable returns, which also increases overtime with rental inflation.

If you are investing in property by buying it on finance/loan, the rental income can cushion your EMIs (Equated Monthly Installments) and provide you the leverage and savings which can be invested elsewhere.

2. Commercial Renting

If the laws or rules in your locality permit commercial uses, you can rent your property for commercial purpose such as setting up a shop, showroom space, retail store, etc. The rents are comparatively higher and you can also collect a larger deposit, assuming the location has good commercial potential.

However, this may not suit everyone because you must be well-versed and conversant with business dealings, monitoring, etc. But people with strong local knowledge, influence and experience in the area can explore this option.

For instance Mr. Mahesh who lived in Mysore in his own ancestral property for more than 20 years decided to let out one portion on the front for a grocery businessman. This fetched the family a rental income of Rs.6,000 p.m and a deposit of Rs.1 lakh, which he could invest in a fixed deposit.

His friend Raghu who had a property in a prime area had one small corner space close to the road, which was converted in to ATM space. These are good examples of how commercial renting can be explored.

3. Investing in Property – Company Leasing

Many companies prefer to have a guest house or lodging facility for employees, delegates or guests who visit their office for a few days or longer period like few months. In some cases companies pay the rent as a perk/benefit for certain key employees or senior executives. Companies take houses, flats, villas or service apartments on lease for this purpose.

If you provide your house or flat on rent to a company you can expect to generate higher rents and also get a lump sum deposit. However, you may need to make changes or provide the required facilities and furnishing that corporate demand. If you can make such investments, then a company lease could be a good deal.

4. Paying Guest (PG) Accommodation

This is an informal arrangement where you provide one portion of your house to a guest who pays rent for the same. This can work in different ways but broadly falls in two categories:-

  1. One where you have a member in your house or room and charge rent for it
  2. Two where you have one separate/demarcated area/room, which is meant for the guest/tenant

In addition to the accommodation some owners provide food, furniture and other facilities as applicable, and these will be included in the monthly rent. Most people call this accommodation as “PG” in short.

Why owners resort to PG? The rentable space/portion could be small. In some cases the owner himself living in a property might want to generate some income from his home. Some owners who cannot sell the property or relocate might prefer to offer PG accommodation so that they have a source of income and can stay there on a sustainable basis.

Surprising in large posh metro cities even families who live on rent could sub-lease it to bachelors as PG accommodation.

5. Hostel/Lodging Accommodation

This is more commercial in nature and may not suit everyone. This is ideal for people who have property in prime location and would be willing to put some effort to run a commercial set up. These are affordable staying options for students, working professionals, business men and those who want to stay in the city for a longer period.

How is it different from hostels? These hostels, which are also called PGs serves as a medium to long term accommodation. If you plan to work in a city and need temporary accommodation for a few months until you settle down, a service apartment styled hostel is ideal. The business model is quite simple.

The owner or the manager of the hostel manages several rooms and common areas and has to collect rents, deposits, etc and also monitor all maintenance and housekeeping activities. Since this is for flexible for both short and long term, you will find that some frequent turnover of tenants every few months.

For instance a tenant can stay for a month or even for 2 years. Managing the rollover (turnover) or occupancy and ensuring adequate cash flow can be a challenge. If one manages the set up well, consistent increase in cash flows can be achieved for long period of time. This can become a full-fledged cash cow business, which can generate income for a long time if managed well.

For example Triplicane (Thuruvallikeni in Chennai) is an excellent model or example of affordable lodging for bachelors who land up in Chennai. Most people come to the metro for studies, job, business, short term work, etc. These accommodations are a boon for such people because it is not only affordable but also flexible for short as well as long-term stay. There are similar models in other large cities and towns as well.

Investing in Property – Options to Generate Funds

1. Loan Against Property

Lets get the basics clear. This option is available to you assuming you have full rights (unencumbered) and ownership of the property. For those who are still paying their loans, this option is not available, because the property is mortgaged.

Assuming you own the property, you can get a loan against such property from a bank or financial institution. However, this comes at a cost (interest) which you have to pay for the loan. This option is ideal for businessmen or traders who need capital or funds to invest in their business or expand their trade or business by introducing additional products, opening new outlets, etc.

However, the owner or borrower should be confident that the business can provide returns which are higher than the cost of borrowing otherwise it can lead to negative cash flows. Default in paying the loan can also lead to seizure of property, which one must be very careful about. So this option is not recommended unless you can deploy the funds in a business that can generate higher returns.

2. Reverse Mortgage

Reverse mortgage is the opposite of regular mortgage. This is again available for the property which is fully owned by retired owner (s). Assuming the owner or owners are senior citizens, they can provide the property to a bank for reverse mortgage.

The bank values the property and pays a regular pay out (monthly, quarterly, etc). This is the reverse of mortgage – where you pay the bank (in reverse mortgage the bank pays you every month/quarter/etc).

The bank will do some research and calculate the valuation of the property and estimate its future growth as well. Considering various factors like price inflation, interest rates, etc the bank will decide on a periodic payout.

The payout is available till the lifetime of owners (assuming they are husband and wife). The bank will judiciously restrict the payout so that does not exceed the total value of the property.

After the lifetime of the owners the net value of the property after adjusting for all the payouts would be passed on to the legal heirs. Alternatively, if the legal heirs repay the total payouts to the bank and buy back the property.

3. Construction and Redevelopment

For people who have houses on large tracts of land, the best option would be to develop the space to generate higher capital value and more income.

For instance people who had 3-4 grounds (1 ground = 2400 SF) in mid-tier towns have constructed apartments – which were either sold, leased or partly sold and leased as the case may be. New construction options may also include a combination of commercial, residential and other options provided you have the expertise to manage it.

People owning large tracts of land spanning an acre or more have also been part owners of malls, hotels and office properties. But this requires thorough knowledge of local laws, business acumen and ability to handle tough projects.

Read more on making money by renting property at How to Make Money Renting Property?

Conclusion – Investing in Property

The above options for generating funds by investing in property are only indicative. If one can use their creativity and business acumen there can be various multiple options available.

However, the safer and simpler way to get started is to stick to residential property or providing PG accommodation. Once you get the hang of the trade and market you can explore other commercial options.!!


About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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