Although they may have bought a property of their own, many home owners prefer to rent out their new home and continue to live in rental accommodations. We examine the reasons for the same and the benefits and drawbacks of doing so
A number of home owners, who have invested in properties located in the suburbs, prefer to themselves live on rent. Consequently, they put their own house or apartment on rent. Such people let out their properties on rent, for different reasons.
However, some of these areas still lack proper connectivity and basic amenities. For some, living closer to their place of work is a must, while others may wish to live as nuclear families.
“Many people who have invested in new flats, still prefer to live in central areas, as the new areas are poorly inhabited. People are also concerned about law and order problems in these new regions. So, they prefer to rent out their properties, with minimal furnishings,” explains Rajiv Mehrotra of Sunshine Properties.
Whatever be the reason, home owners should understand the merits and demerits of putting their apartment on rent.
Risks in renting out your apartment
If you rent out your flat and start living closer to your work place, you may attract an income tax, if the tenant stays for more than 12 months.
The tax implication: By law, there is a direct financial benefit. As standard deduction, 30% of the net annual value is deductible (this value is generally the total annual rent minus taxes paid). For example, consider that your annual income from house property is Rs 8 lakhs. If you have paid a municipal tax of Rs 2 lakhs on the property, the net annual income will be Rs 6 lakhs.
Other than tax, owners need to safeguard their property. This includes ensuring that tenants do not cause problems in vacating the property or damaging portions of the property. Owners should also ensure that their tenant is not involved in anti-social or illegal activities, as this could land them in bigger trouble.
Advantages of letting out your property
The biggest advantage of renting out one’s apartment, is the additional income that you get.
“The amount left after deduction of tax from the net annual value, is your additional income. This income can be saved as a pension fund, for you post-retirement expenses,” suggests Manish Saluja, a Delhi-based financial planner.
Moreover, an increase in property prices, will also add to your asset strength. However, over the last two years, property rates have largely remained steady, while some markets have even seen a slight correction. Nevertheless, industry experts point out that these movements are cyclical and there ought to be a hike in rates too. “The overall rise in property price, can also serve as a hedge against inflation,” adds Saluja.
Precautions, while renting a property
If you plan to rent out your house and also live in a rented accommodation, calculate the amount of rent you will be paying, versus the effective rental income that you will earn and the costs that you may save on commuting, before arriving at a decision.
Also, be wary of letting out your property to prospective tenants, who may have got your number from various sources. Instead, try to look for tenants through trusted sources, like friends and family. Home owners should also run a background check on their prospective tenants, via police verification, social media channels, etc.
A well-informed decision about tenants, will make the process easier and safe, advises Ankit Sharma, a Delhi-based lawyer.
Once you have zeroed-in on a property or tenant, ensure that you sign a rent agreement, adds Sharma. While lawyers have a template for rental agreements, it is advisable to look at all the clauses and change it according to your needs. Clauses pertaining to repair work, payments to the residents’ welfare association (RWA), etc., should be clearly specified, to avoid confusion and disputes.