For an NRI investor with property/properties in India, the choice between keeping it vacant and letting it out needs careful consideration. While some may prefer waiting it out and allowing the value of the property to appreciate, some may consider letting it out to tenants in the interim and earn returns in the form of rent. In the latter case, there’s the added challenge of being well-informed of the various factors – legal and otherwise, which influence the owner-tenant relationship.
But, that’s not all an NRI owner must know about before actually letting out the property. Let’s take a look at some of the things that need due consideration before the tenant moves in!
‘MUST KNOW LIST’ of 7 Things An NRI Owner Should Check Before Letting Out Property:
Before arriving at the decision of letting out the property, the NRI owner must consider certain points such as:
1. Rent Expectation:
Knowing the amount of rent to charge is crucial before deciding to let out the property. It is important to do a thorough research of the prevailing market rate, based on the factors like:
- the locality and area where the property has located
- the type of property and the market demand for it.
- how well connected is the property to essential amenities and services like transport, hospitals, markets, offices, etc
Some tenants are ready to pay a slightly higher rent if that saves them long hours of commute. Also, if the owner ensures that the flooring, plumbing and paint job are done well, it is possible to attract the kind of tenants who are willing to pay a little more.
Additionally, the tenant base for smaller houses is higher which ensures better chances of getting the right tenants faster. Newer houses including the renovated ones command higher rents compared to older ones.
Moreover, if the property is adjacent to public parks, recreational centres, etc. or is in a housing complex equipped with such amenities, you can ask for a higher rent than the one in your area which is devoid of these amenities.
2. Tenant Segment:
The NRI owner needs to decide on the target tenant segment –
Usually, corporates will only take interest in semi-furnished or well-maintained properties. Since they generally opt for long-term contracts, they could bargain hard on the annual hike in the rent. But having them may ensure a better profile of tenants as they are only given out to their employees.
Some may only prefer families over individuals, especially in India when it comes to a property in a housing society. A lot of societies encourage this trend and want to avoid letting singles or bachelors stay as tenants. However, there is not a law which can restrict an individual / single to rent out a property in a certain society.
3. Tenant Verification:
The owner must do a thorough background check on the tenant. A tenant’s proof of identification, along with other necessary details need to be submitted to the police station in the area of the property for verification. It is ideal to consider the factors below before handing over the property to the tenant.
- Ensure that the tenant is not a fraud or claiming to be someone else.
- Make sure that he/she wasn’t (and isn’t) involved in any anti-national or anti-social activities.
- Cross check with past records to make sure he/she pays the rent on time.
- Ask for some proof to verify his/her permanent address.
- Verify his/her employment status.
Additionally, it is necessary for the owner to obtain a NOC (No Objection Certificate) from the housing society where the apartment is located – a society has the right to accept or reject a tenant.
Entrusting the property without doing a thorough verification of the tenant can have serious consequences – the owner of the property could face imprisonment if the police verification is not completed! The tenant could be involved in an illegal profession and could use the premises for such activities that could have legal implications for the owner as well.
4. Tenant’s Rights:
Before letting out property, the owner must understand the laws that govern the owner-tenant relationship in India.
It is necessary to consider a tenant’s rights in detail before the tenancy agreement is drafted – to make sure that in case of any legal action on account of a breach, the owner’s interests are protected. You can refer to a post we did, which discusses the various Rights of a Tenant in India, here.
5. Tenancy Agreement:
The tenancy agreement should be drafted with a lot of care and consideration.
There are generally two types of tenancy agreements –
- a lease agreement
- and a leave and license agreement
While a lease agreement gives a tenant the right to occupy a property for a longer period of time, a leave and license agreement typically gives a tenant the license to occupy the premises for a period specified in the agreement. It is a norm to keep such agreements for 11 months.
Owners generally do this to safeguard their interests, as the Rent Control Act, applies to only those agreements which are 12 months or more. However, this doesn’t take away the basic rights a tenant has, as mentioned in the leave and license agreement.
As a common practice, the tenancy agreement should contain:
- purpose of tenancy (residential or commercial)
- date of commencement of the agreement and its duration
- The terms of rent
- mode of payment and advance rent paid
- security deposit and the amount paid
- and the circumstances when it is refundable.
Some important clauses that need to be included are:
- grounds for termination of the agreement
- annual rent hike frequency (if any) and the % of such a hike
- the party who will bear the cost of society maintenance and repairs
- notice period for lease/leave and license termination and agreement renewal clause
Additionally, the agreement also needs to spell out who will bear the rent agreements deed registration expense (property leases/agreements of a duration more than 1 year need to be registered), and the stamp duty. Also, and 11-month agreement means the need to register the same is optional. Ordinarily, these expenses are shared between both the parties.
6. Tax Implications:
‘Income from house property’ is the term used to tax the rent received by the owner of the property. The property is taxable on the basis of its annual value.
This annual value of a property is determined on the basis of whichever is higher – the rent actually received by the property or the amount of rent for which the property can reasonably be expected to be let out.
Any rent received with respect to a property that is let out, is taxable under this head, including rent received with respect to a residential house, as well as commercial property. If the owner lets out a property for a nominal amount; then the amount to be considered for taxation of such property, would be the market rent and not the rent the owner has received.
Similarly, if the actual rent received by the owner is higher than the market rent, the rent actually received / receivable, will be considered for taxation purpose.
7. Costs To Be Borne:
Owners will have to bear some transactional expenses like brokerage, stamp duty, registration cost, etc. while letting out the property (these expenses are often shared by the owner and the tenant).
Additionally, if the owner is letting the property out to a corporate client, he/she will have to spend some amount towards furnishing the property.
If the tenant turnover is high, the owner will need to undertake periodic repairs and maintenance activities like painting and cleaning. While newly built housing complexes with added amenities like clubs, pools and gymnasiums might draw tenants like bees to honey, they may not be willing to pay for them if they don’t use them. The owner might need to bear the maintenance fees for these amenities.
It is advisable for the owners to get their properties insured before letting them out – this is simply a precautionary measure to protect against potential damages beyond the security deposit amount. Doing a profitability check of letting out the property as against the amount spent on maintenance of the property also helps.
For an NRI owner, managing all this from overseas can be quite a task. What the NRI owner needs are someone who can manage it all – right from screening and choosing the tenants, to the nitty-gritty of property management including the maintenance, taxes, and legalities. In other words, an NRI owner needs a property manager.
These services take care of the daily operations of your real estate investments. This involves handling of all your property-related matters, right from the upkeep of vacant properties, to managing the ones occupied by tenants, from dealing with legal and tax-related issues to the overall maintenance and periodic repairs.
In fact, calling them property manages is rather restrictive – essentially, they are real estate portfolio managers!
If you are an NRI owner, looking for a real estate portfolio manager for your properties In India, wait no more – get in touch with Homzhub and allow us to manage it all for you!