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How to earn money on your property

September 07, 2006 17:06 IST

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.

Retailers

Minimum area required

Super markets

3000-5000 sq ft

Restaurants

2000-5000 sq ft

Toy shops

1000-2000 sq ft

Shoe shops

800-2500 sq ft

Jewellery shops

500-5000 sq ft

Book stores

2000-10000 sq ft

Furniture store

5000-20000 sq ft

Departmental stores

15000-50000 sq ft

(as told by property consultant, Ramesh Nair)

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, Café 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):

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)

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:

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.

However, these disadvantages can be prevented if things are made clear during negotiations.

Kamiya Jani, Moneycontrol.com