A property that earns rent every month may appear to be a straightforward investment. The actual return, however, depends on costs, occupancy, financing and the price you paid.
CALCULATE NET RENTAL INCOME
Start with realistic annual rent and subtract expected vacancy, maintenance, property management, society charges, insurance and other relevant expenses. Consider applicable taxes and compliance costs as well.
COMPARE THE RETURN WITH THE TOTAL COST
Use the complete acquisition cost rather than only the down payment. If the property is financed, review interest and repayment obligations separately from the property's operating performance.
ACCOUNT FOR VACANCY AND REPAIRS
A tenant may leave unexpectedly, rent may take time to recover after a vacancy and major repairs may arise. Keep an appropriate reserve instead of assuming every month will produce the same income.
APPRECIATION IS NOT GUARANTEED
Future prices depend on local demand, infrastructure, supply, economic conditions and the property's characteristics. A projected increase in value should not be treated as certain.
COMPARE ALTERNATIVES
Consider liquidity, concentration risk, effort required to manage the property and how much of your wealth would be tied up in one asset. Real estate transactions can take time and involve significant costs.
A careful estimate based on conservative assumptions is more useful than a headline rental yield. Review the figures before treating a property as an investment opportunity.
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