Jaspreet Bindra was a strong proponent of real estate investments. He is a salaried executive who has made it to a CXO level position in three decades of his career in pharmaceutical sector. He has always had an affinity to real estate given the bull-run the real estate sector had shown in the last decade. Jaspreet is now waking up to the reality. Real estate market has shown correction for several quarters now. He is contemplating diversification. With only 10 years remaining before his retirement commences he is now moving to diversifying all new investments into different asset classes. He does not want to sell any of his current investments in property but wants that existing portfolio of properties should generate decent cashflow for him to be able to pay off the mortgage (on them) before he retires. Here are some recommendations for people like Jaspreet who maintain a property portfolio:

UNDERSTAND THE RENTAL YIELD. Review every investment in real estate for yield. The properties must have increased many fold giving a decent capital appreciation, however if you are relying on their cashflow ensure you are earning good yields from your property investments. Here is a simple calculation to look at:

Gross Rental Yield = Annual Rental Income x 100 / Property Value
Net Rental Yield = (Annual Rental Income – Annual Expenses) x 100 / Property Value
(Property Value is to be calculated in today’s terms as inflation adjusted value of the cost of acquisition of the property)

Remember rental yields may vary on the basis of its location, size of the property and property value. It is always advisable to assess them in relation to your average yield of the micro-market. The yields can differ significantly within the same city. Do your due diligence and list them in the order preferred by you. You can subsequently make a decision whether to hold on or get rid of the poor performers. Please note performance is to be judged not only by the yield but also by the capital appreciation the property has achieved for its holding period.

UNDERSTAND THE FACTORS THAT INCREASE RENTAL YIELDS. To well manage the property portfolio an investor should always stay on top of factors that enhance the rental yields. While increasing the rent, decreasing the annual expenses, maximizing the tax deductions and minimizing the vacancy period can impact significantly, there are many more that can have a substantial influence in driving your yields up. For example refinancing your property home loan to a lower interest rate home loan, ensuring the property is well maintained by the tenant, good maintenance by the RWA of the common areas, keeping your property attractive by installing modern equipment to ensure energy efficiency, periodic renovation of kitchen, bathrooms, & bedrooms, decent paint job & flooring, periodic removal of worn & torn appliances, fittings et al can have significant impact on rental value of the property. Always ensure that your property is suited to your tenants’ family requirements. If he/she is happy, he/she would be happy to revise rentals when your lease term is renewed.

LOCATION & SOCIAL INFRASTRUCTURE HAS A HUGE IMPACT ON RENTAL YIELDS. If you want good rental income, buy a property that has a good location. A well-connected house will always yield a higher rent. One must ensure that the chosen property has the social infrastructure in place. Your potential tenants will always prefer homes close to their work place, kids’ school, hospitals, and public entertainment hubs. They would not like to be stuck in traffic jams daily and hence wouldn’t mind shelling out more on rents to save their transport costs. The ideal neighbourhood should have a strong tenant base. A commercial or an institutional hub in close proximity will ensure a steady supply of working professionals and their families for leasing of your property. The smaller the property, the better is the rental yield because the tenant base gets bigger as we move down the income pyramid.

DON’T IGNORE YOUR TAX LIABILITY. An investor must understand the income tax and wealth tax implications of holding several properties in his/her portfolio. Advantage of a home loan must be accounted for. You must understand that for each rented property you are creating an income tax head in your tax filing records under the head ‘Income/Loss from house property’. Do your calculation with your financial advisor to assess income or loss from each rented or vacant property in your portfolio. Ensure the tax returns being filed are accounting for every property that you have in your portfolio.

PROPERTY MANAGEMENT CAN BE ONEROUS. With several properties in your portfolio, it’s not going to be easy managing them. Revising rental agreements every year, paying property taxes every year, filing tax returns for them, periodic renovations, timely negotiations with potential tenants and supporting your tenants during any unforeseen issue in your property can be very stressful. One must ensure there is a team hired to look after these aspects or the investor has enough time at hand to commit himself to these tasks.

DON’T UNDER-ESTIMATE THE COMMERCIALS OF LEASING. Real estate is a tangible asset. One has to ensure the potential tenant’s background is verified before he enters the lease agreement. Sometimes people do enter with mal-intentions. They may not pay rent in time, may not look after your property as per your expected standards or not vacate the property when the lease term ends. This can cause lot of stress. Ensure you have a good lawyer doing your lease agreements every year with emphasis on any defaults by the tenants being dealt with sternly. Be fair in the agreements. Working professionals are qualified enough to judge if the agreement is lop-sided in the landlord’s favour. They are keen to enter agreements that are mutually beneficial and protective of each other’s interests.

REVIEW YOUR PORTFOLIO PERFORMANCE EVERY 2 YEARS. Real estate portfolio can be reviewed every 2-3 years. Holding a property for more than 3 years will give long term capital gains if sold. These gains can be tax exempted if re-invested in other property or bonds for 3 years. Ensure the portfolio is cleaned up if there are properties that have not delivered decent yields and/or capital gains. You can always exit and reinvest. But ensure the yield & capital gains (minus the inflation of the holding period) are a positive number. The market averages must also be looked at to ensure your returns have been decent.

The most successful property investors have a firm game plan. They keep the network of good people to do the jobs they can’t or don’t want to do. This enables the investor to stay focused on the big picture of building and efficiently managing their portfolio.

Amit Kukreja is a fee-only financial planner (FPSB) and Investment Adviser (SEBI). He is the founder of WealthBeing Advisors, a financial planning and wealth advisory firm.