Your second home, rent out or sell it

Before renting out a property, deduct all the expenses which include taxes, mortgage, maintenance, utility bills, miscellaneous expenses, etc., and you are still making a profit, then, it is better to rent it out, otherwise, sell it.

Before selling a property, one needs to calculate the expected profit. Assuming that the home owner would lose around 1 per cent to agent fees and other expenses like capital gain, after deducting these expenses, if the profit is not much, then, it is advisable to hold on to the property and wait for the market to improve.

In case of no rental income and there is no growth potential, you should think about selling the property.

What should we do in current market?

Those who have bought property recently or in last 2-3 years, the prices either are down or are at same rate. Prices are unlikely to rise in next couple of years. It is better to rent out property.

Cash Flow

Cash flow = Rent – Expenses (mortgage/maintenance etc)

There may be negative cash flow now and in next few years. If you believe that, the prices will soar in another five to seven years, it is advised that you wait for the market to open and then sell the property at a profitable cost.

Case study

Mr Sharma has invested in a property and has taken a home loan on property. Property has a negative cash flow. Mr Sharma is hoping that property rates will boom in next 5-7 years. He can take benefit on tax deduction.

Let us assume that flat cost is 70 Lakh then EMI will be as below for 20 year term. I have calculated for 7 years considering Mr Sharma will sell home within 7 years. Interest paid in 7 years is 3256111 and principal paid is 976199. Net Annual Value (Rent - municipality tax) is 1522566.

Year	Opening Balance	EMI*12	Interest paid yearly	Principal paid yearly
1	5600000	604616	499744	104872
2	5495128	604616	489906	114709
3	5380419	604616	479146	125470
4	5254949	604616	467376	137240
5	5117709	604616	454502	150114
6	4967595	604616	440420	164196
7	4803399	604616	425017	179598

 

 

 

In addition, tax benefits will be as below. Every year you can claim Principal amount of 1.5 lakh as a deduction.

Year	Rent*12	municipality tax	Net Annual Value (Rent - municipality tax)	standard deduction @ 30% of Net Annual Value	Income from Let-out House Property, NAV-interest paid (max 200000)
1	192000	5000	187000	130900	-200000
2	201600	5250	196350	137445	-200000
3	211680	5513	206168	144317	-200000
4	222264	5788	216476	151533	-200000
5	233377	6078	227300	159110	-200000
6	245046	6381	238665	167065	-200000
7	257298	6700	250598	175419	-200000

 

 In 7 years, rent makes up for the negative cash flow.

Year	Interest paid yearly	Rent*12	cash flow
1	499744	192000	-307744
2	489906	201600	-288306
3	479146	211680	-267466
4	467376	222264	-245112
5	454502	233377	-221125
6	440420	245046	-195374
7	425017	257298	-167719
Total	3256111	1563266	-1692845

 

Conclusion: If property prices increases @5% every year and Mr Sharma decide to sell the property he will be in profit considering the rent received, tax benefits.