Over the past few decades, real estate has been increasingly studied as an investment vehicle. A good investment in real estate should yield high returns over a long period of time. It’s common to hear of cases where people invested in properties worth a few thousand rupees a few decades ago and now those properties are being sold for crores. However, such investments rely on capital gain appreciation over a long period of time and they tend to be very illiquid as the holding period of such properties is very long. Illiquid assets have long waiting period for generating income.
Understanding Rental Yield
A property’s rental yield is the percentage of the property value that you earn as annual rental income.
Gross Rental Yield = (Annual Rental Income / Cost of the Property ) * 100
If you have bought a property for Rs. 12,00,000 (12 Lakhs) and you earn a monthly rent of Rs. 10,000 then your Gross Rental Yield would be
Gross Rental Yield = (10000 * 12 / 1200000 ) * 100 = 10%
This indicates that you earn 10% of your property cost as rental income per year.
However, the investor should be aware of certain property expenses.
1) Taxes: the property taxes, income taxes that would be levied on the property
2) Maintenance Charges: covering up for the fixture, furnishing and fitting costs and their replacement costs.
3) Agent Fee: Unless the Investor looks out for tenant by himself, an agent help is required in finding a tenant.
4) Non Occupancy: It is better to be prepared that the property would be vacant for at least 1 month in an year.
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