Personal Finance

Does renting out your house make sense?

Meera Siva | Updated on August 04, 2019 Published on August 04, 2019

The Model Tenancy Act is unlikely to spur rental supply in the housing market

The Budget, and the Model Tenancy Act that was released later, emphasise the need and role of renting to meet housing demand. But for owners, there are no compelling incentives in the current market situation to rent out their houses.

Not lucrative

For one, houses have not been a good investment to buy or hold for financial returns. In the past, when the housing market was hot, purchases were made for capital appreciation. Data from the Residex Index show that prices increased about 10 per cent on average during 2007-2013. In cities such as Chennai, the average increase in that six-year period was over 20 per cent. With good gains, rents were not a great motivator to buy.

But as the market slowed in the next five years, property prices grew by less than 2 per cent during 2014-18, as per a report by Colliers, a global commercial real-estate services organisation. In some cities such as Delhi, the price growth was a mere 0.2 per cent, as per Residex. House price growth has lagged retail price inflation in the past four years in the top eight cities, as per property consultancy Knight Frank.

Without capital gains, the low rental yields — about 2-4 per cent in most cities, as per a report by the IDFC Institute — are not a great value proposition. Rents must be attractive to entice home buyers to buy or stay invested in real estate. Without either a price correction or a hike in rent, rental yields would continue to be low and there is no reason to hold an asset that gives low returns.

The buy-versus-rent calculator from financial advisory firm Arthyantra shows that for cities such as Mumbai, EMI is four times the rent for a house. You are better off renting than owning as you can invest the surplus and get better returns and liquidity. For NRIs and others who live far away, there are also property management issues to take care of with renting out. And hiring a property manager would further add to the costs and dent returns.

Other deterrents

While the idea of the new Model Tenancy Act is to make rental an interesting segment, it inadvertently adds to the issues of the owners. Take the case of security deposits collected from tenants when a house is let out. This typically tends to be upwards of six months’ rent, to cover non-payment of rent and to fix any damages caused during the tenant’s stay. The Act requires that the security deposit be capped at two months’ rent.

This seems to be ill-conceived for a few reasons. One, a tenant may default on rent, and the Act allows the owner to seek remedy if the default is for two consecutive months. Assuming it takes 2-4 months to get a judgement, the owner may end up losing rent and having to rely on the court process to get his/her dues. Also, if the tenant causes significant damage to a property, the small security deposit would not cover the repair expenses.

The Model Tenancy Act, however, provides some comfort to owners by way of reducing the legal worries for getting back possession of the house. The Act recommends creating a special Rent Court to handle rent-related disputes and resolve them in 120 days.

Also, after the end of the lease tenure, if the tenant does not vacate, the owner is eligible to get twice the monthly rent for two months and four times the rent afterwards. This clause, along with speedy resolution, will help the owner get possession, atleast ensuring that the principal is protected. The Act lays out the responsibilities of owners, tenants and property managers so that renting out is less stressful for owners.

While buying or holding a property to rent out is not a great idea, there may be situations where it might be. One situation is when you buy a property or own a house that you plan to occupy in a few years. While the rent may not give you much returns after factoring upkeep expenses, renting out will pay for the apartment maintenance costs. These can be ₹3-5 per sq ft and can add to your expenses.

Two, is when you need to wait a few years before you can sell the house. One example is an old apartment that is likely to be redeveloped, as selling it currently may not be easy or fetch you a good price. These projects take time as all owners have to give consent.

Three, if the property is in a sought-after location, you can charge a good rent. You can also consider options such as corporate rental, renting out to a small office or on short-term rentals to increase return. You can also consider furnishing the house to increase monthly rent. Four, you can also rent out a portion of an independent house. The rent can help you pay off your loan faster and the tenant can share expenses such as maintenance and security.

Published on August 04, 2019
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