Property prices have just
been going up and there is no looking back. As Sanjeet Narain, Director
of commercial property at Narain Corporation, says: "Property
appreciation is much stronger than stock markets. Stock markets can
probably crash down anytime whereas property rates do not drop down
that fast."
Quite a few investors are
looking into it as a flourishing option. However, with prices reaching
a peak, it is quite understandable to invest in real estate market but
getting returns out of it is a little confusing.
The
first thing that would come to your mind is 'rent.' Giving your
property on rent is one of the best ways to get returns out of
property. Not just that, you silently also enjoy the capital
appreciation.
Therefore, if your budget
allows, you can invest in property and get good regular returns with
little risk. People with a low budget would want to stop reading ahead.
But if you take a loan from a bank and buy a property from that, you
can use the rent earned from the property to pay your EMI (equated
monthly installment). Although you may be at no profit no loss
situation, but aren't you building a property as an investment for your
self?
There are different ways of earning rent depending upon the kind of property that you buy.
A. Commercial Property
If
you own a commercial property, you have a lot of choices in store for
you. For renting a commercial property, one has two options --
retailers and office occupiers.
1. Retailers
Depending
upon the city, area and location, the rent differs for each of the
below options. A simple rent every month can work like a salary for
you, that too without working. Rather than keeping your property idle,
the options given below can help you to extract money from your
property, which can do wonders for you.
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Retailers
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Minimum area required
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Super markets
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3000-5000 sq ft
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Restaurants
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2000-5000 sq ft
|
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Toy shops
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1000-2000 sq ft
|
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Shoe shops
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800-2500 sq ft
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Jewellery shops
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500-5000 sq ft
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Book stores
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2000-10000 sq ft
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Furniture store
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5000-20000 sq ft
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Departmental stores
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15000-50000 sq ft
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(as told by property consultant, Ramesh Nair)
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Franchisee
Giving
your property to any well-renown brand is another lucrative option.
Since the multinational companies have realized the potential of India,
they have been trying to grow the number of outlets in India.
Like,
McDonalds, which has so many outlets in India especially in Mumbai.
Similarly, may other brands like Pizza Hut, Barista, Caf� Coffee day,
etc. may be waiting for you.
Rent may
not be the only way to earn out of here, the other way would be asking
for a profit share every month. You give them a place to work and they
give a part of their profit. Different brands function differently,
depending upon your negotiations with them, you can either decide on
the monthly rent or earn by the profit sharing basis.
Rental rates of commercial property in Mumbai (as told by Sanjeet Narain)
Mumbai Rental rates (per sq ft):
- Bandra Kurla Complex:----- Rs 200-250 per sq ft
- Andheri (West) :----- Rs 90-120 per sq ft
- Andheri-Sakinaka:----- Rs 40-60 per sq ft
- Malad:----- Rs 40-60 per sq ft
- CST Road-Kalina:----- Rs 125-175 per sq ft
2. Office Occupiers
These
office occupiers basically include all Software companies to financial
institutions to telecom companies. According to Sanjeet, ideally, the
area required for the following options should be anywhere between
1,000 sq ft and 5,000 sq ft (excluding the pay and park option, which
could be more than 5000 sq ft).
a) Multinational Companies and Financial institutions
India's
cheap labour and high purchasing power has attracted quite a many
multinational companies to start up their business in India. These MNCs
never buy a property in India; they always prefer to take it on rent.
These MNCs generally give a high rent and are quite regular with their
payments. Examples would be BPOs, software companies, financial
services.
b) Banks
With
the number of banks growing in India, all banks want to reach out to
the remotest area of the city. You never know if they want to open a
branch where you have bought a property. If your area is big enough for
a bank to operate, you must look into the newspapers where they put in
the
advertisements and invite tenders. You can easily earn a good amount depending upon the area.
You
can be sure that banks are generally quite regular with their rent
payments. Banks normally take the property on lease i.e. more than five
years, says Narain. The rent basically depends upon the total area and
the location but you can be sure that its pays off quite high.
c) Business Centre Agreement
"This
is another option of earning money and saving tax. Generally, you have
to pay tax on the rent you earn but in Business Centre Agreement, you
term your rent as service charges and hence you save property tax,"
informs Sanjeet. When the landlord gives his furnished property along
with various amenities like telephone, electricity or computers to the
client, he will take rent from him but the rent will be termed as
service charges.
This helped the
landlord to save his tax, which he would have had to pay on rent.
However, now the government levies 12.24% service tax on service
charges as well, says Sanjeet.
Nonetheless,
this is another good option to earn from your property. So, if you have
an ideal furnished place, give it on rent today. The rent or rather the
service charges are higher here since the client does not have to spend
much on the infrastructure.
d) Pay and Park
If
you have an open plot in the midst of the busy city, converting it to a
parking area is one of the best options. With the growing number of
vehicles, parking seems to be the biggest problem for all the drivers.
You can resolve their problem and also make money out of it.
Generally,
it costs Rs 20 for parking a car for an hour. Therefore, even if there
are 200 vehicles per day, you can easily earn Rs 4000 per day, which
further means Rs 1,20,000 per month. Isn't it a great deal? Think about
it.
In metro cities, you can get a return of about: (as told by Sanjeet Narain)
- Mumbai:----- 10-12%
- Delhi:----- 8-11%
- Bangalore:----- 8-10%
- Hyderabad:----- 10-12%
- Kolkata:----- 8-11%
B. Residential Property
The
location and the living standards are two important things for
residential property, rightly said by Chetan Narain, president, India
Institute of Real Estate. The rent generally differs depending upon the
location. One needs to first set the right budget to invest in
residential property.
According to
Chetan, "Commercial property can give you higher returns as compared to
residential property. One can 10-12% return in commercial property
whereas residential can give you about 5-6%, exclusive of taxes."
However,
if you have bought second homes as an option, or bought a property in
any other city, grow your bank balance by giving it on rent. Here are
the options:
Company leases
Giving
your property to corporate employees is one of the safest options.
Their respective companies generally give the deposit and the rent.
Having a legal document stating the rent and number of months is
advisable.
Individual leases
An
individual may pay his rent and security deposit for himself and his
family. This is the most common trend for residential property. The
house is generally given on 11 months agreement.
Paying guest (PGs)
Individuals
from different background and families stay in one house and the rent
is paid individually. Here, the landlord would stay in one of the rooms
and may give his other rooms on rent. There is no legal document, which
is signed between the landlord and the PGs. The deposit and the rent is
quite less in this case.
Guest houses
A
furnished apartment with a cook and a housekeeper given on a rent for a
short period of time would fall under this category. These guest houses
are quite common at hill stations and in cities; they are generally
rented on occasions like wedding or some celebration.
Service apartment
A
completely furnished home with all amenities can also be given on rent.
Here you can earn a higher rent but your personal belongings may be at
stake.
Precautions to be taken
"Most
of the times, the commercial property is not given on rent but on leave
and license agreement, which means that the landlord gives his property
to the client for less than five years. If the property is given to the
client for more than five years, then it is said to be given on lease,"
informs Sanjeet Narain.
In case of
lease, you have to pay 5% stamp duty of the lease period. Whereas, in
case of leave and license agreement, the maximum stamp duty to be paid
would be approximately Rs 50, 000.
Here are few of the points, recommended by Ramesh Nair, that are to be taken into consideration at the time of negotiations:
- Profile of the occupier
- Security Deposit
- Lease term
- Maximizing rent
- Escalation of rent at the time of renewal
- Maintenance cost
- Parking
- Signage
- Power availability
- Competitor clause
- Repairs and alterations
- Property tax
- Termination rights
- Lock-in period
- Force majeure
- Various indemnity clauses
- Sub lease clause
Disadvantages of giving your property on rent
There are a lot of advantages of giving your property on rent, but there are also a few disadvantages.
- Landlord
cannot use his property for personal purposes once it is given on rent.
However, it is just for a particular period of time as negotiated.
- Sometimes, the tenant may delay the monthly rent.
- Few tenants don't vacate the house on time. They keep postponing the vacating date.
- The occupant may mishandle personal belongings like bathroom fittings, walls and so on.
However, these disadvantages can be prevented if things are made clear during negotiations.