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You’re guide delhi rentals playing landlord

You're Guide Delhi Rentals Playing Landlord

It is essential that the rent should cover at least the cost of ownership ¬ the interest factor and a part of the principal amount

Jai Mavani

If you are the owner of a property and you have rented it out to tenants, you will be expected to maintain your property for them. This is because (and you can take this as a rule) a tenant does not have the time to maintain the asset himself and always expects the owner to maintain it.

If your property has housed tenants for a long time and commanded fairly competitive rates, you can expect a better valuation. The case would be vastly different for a property that sees short-term tenants and rates that spike periodically. Always remember to factor in transaction costs such as stamp duty and brokerage. This counts as good advice because these costs can be quite high. Apart from speculation, demand and supply determine the price of your property most significantly. Selecting your tenants while selecting a tenant, you must consider certain attributes. Primarily, you must ascertain that you have the right mix of positive cash flow and security for your property. The badly chosen tenant can steadily become a nightmare ¬ which might never end!

It is the class of your property that eventually attracts the type of tenant. And that’s a fact. You may find some aspirants who offer you a higher rent for your property and some that don’t quite make it to your expectations in the department. However, don’t blindly go in for the largest bundle of cash offered. Keep in mind the painful fact that the tenant eviction process in India can be excruciatingly long. You should also consider that in India you can’t always research the credit history of a potential tenant. This is mainly due to the fact that individual credit bureaus in India, as compared to foreign countries, are in nascent stages of development.

Personal references from common friends and acquaintances or third-party references are the preferred and most common form of background check. You can ask for such references from your tenants before closing the lease agreement. Before you get into an agreement with the tenant, remember to gain absolute clarity on what s/he intends to do with the property. This is important since there are situations in which your property might experience a greater degree of use, hence wear and tear, than others. For example, if the property will be used as transit accommodation or a guest house, maintenance cost will rise significantly. If your tenant mentions that his tenancy will involve the stay of many children, you can expect a similar rise in the level of wear and tear.

Try to factor in these higher maintenance costs into your rent expectation. Terms of agreement your commercial negotiations should factor in various pricing and financial issues. They should ideally include a comprehensive list of responsibilities of the lesser and the lessee.

This is what you need to consider while quoting a rent. It is essential that the rent should at least cover the cost of ownership, which means the interest factor of the EMIs if the leased property is leveraged. Additionally, it should also include a part of the principal. It should signify a fair return on investment for you. It should equate with the market levels, factoring in any escalations due to any special usage. Include the society maintenance charges into your rent quote.

Also calculate the rent with the understanding that you would be bearing the electricity and water charges. There should be an extra charge for any additional space provided. This includes parking spaces and such considerations should be declared to the tenant in advance. Make it a point to bill your property maintenance charges and security charges separately. It might be prudent to draft an exclusive agreement for these billings with a detailed disclosure of what types of maintenance will be covered. The stamp duty and registration cost must be borne by the tenant though it may be noted that in case of a lapse of such payments, the authorities concerned may charge the landlord. If there is an incremental fee or profit arising from the sub-lease of the property, the landlord is entitled to a share of such monies. There should be provisions for a security deposit and terms of repayment of such a deposit. With regards to the property usage, you should lay down some terms as to what the tenant can and cannot do on the premises. If any modifications can be made to the fittings, or if any alterations to the structure (even painting permissions) are allowed, it is the landlord’s responsibility to clarify this in advance to avoid laster misunderstandings. The timeframe of the lease and the escalation of price on rollover must also be discussed in advance. Include a mid-term exit clause in the agreement, including provisions notice periods, penalties, etc.

From an overall perspective, it is essential for you to have a laundry list of sorts that gives you a clear idea of what must be focused upon at the agreement drafting stage. Heads of agreement or a Memorandum of Understanding (MOUs) made with the help of your lawyer and broker can help in creating your checklist during the negotiation process. Your broker can inform you about current market prices and the loopholes you can use in your favour. Make sure your broker is working in your favor even if his brokerage is slightly higher. With a good broker, your negotiating position will be stronger and you can take care of almost any eventuality. Rent collection this could well be the sweetest part of the deal but if you’re cursed with a bad tenant, this could be the biggest torment. You must ensure that the tenant pays his rent regularly and as per the agreement. You can collect rent in the following ways: Cheques or pay order payments to be made for specific dates inter-bank transfers that can be made through direct debits.

The author is Executive Director KPMG Pvt. Ltd. This article was first published in Knight Frank’s guide book titled Real Investment: A real estate investment guide for India

Courtesy: HT Estates 20th Feb 2010

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