Are You Banking On Regular Rental Income? Low Yields, Other Costs May Play Spoilsport

Indians love to buy real estate—it’s something tangible, gives the opportunity to express one’s personality and build memories, and can be passed on as inheritance. But when it comes to investment in real estate, one of the biggest attractions is the opportunity of getting seemingly risk-free rental yield, without actively having to invest and reinvest the capital. It is also seen as passive income that supplements the main income, again without having to put much effort. Many also see it becoming one of the main sources of regular cash flow in their retirement years.

But should you invest in real estate for rental yield, or would you be better off having that one house in which you stay, and invest your money elsewhere? We dug a little deeper to find out the answer for you.

Is It Worth It?

As property prices rise, rental yield emerges as a formidable villain. Rental yield compares the annual rental income from a property to its value and expresses the same as a percentage. Rental yield is an important measurement of the return on investment you are likely to get from your rental property.

You can calculate your rental yield using the following formula: Rental Yield = (Annual Rental Income /Property Value) x 100. For instance, if your property is worth Rs 1 crore and you are getting an annual rent of Rs 2.64 lakh, your rental yield comes to 2.64 per cent.

Earlier in 2024, a report by online real estate portal 99acres found that the average net rental yield for India is 3.30 per cent, which is relatively lower than the 3.50-4 per cent rental yield for Asian countries and significantly lower than the European average of 4.50-5 per cent. On the other hand, the rental yield for India’s metropolitan cities is among the lowest in the world, averaging between 2.44 per cent and 3.96 per cent, as of 2024 (see Rental Yield Across Major Cities).

The rental yields for two of the major metros on the list, Delhi and Mumbai, are among the lowest, despite properties in these regions being priced the highest per square foot (sq. ft). This means that not only are rental yields lower, but even the cost of acquisition is high in India’s top metros, making the process of recovering the cost of your investment an uphill task.

Dilshad Billimoria, a Securities and Exchange Board of India-registered investment advisor (Sebi RIA) and chief financial planner and managing director of Dilzer Consultants, told Outlook Money that the real returns from rental properties are extremely low and one of the reasons is poor rental yields. “Homeowners considering passive income through rental yields may be in for a rude shock. Rental yields on residential properties are around 3-4 per cent post-tax,” she says

In fact, rental yield compares poorly with other safe instruments in terms of returns. For instance, against the average rental yield of 3.15 per cent across eight metros, fixed deposits (FDs) returns are in the range of 6.25-7.05 per cent (see Rental Yield Loses Out).

Low rental yield is not the only problem that will pinch your pocket. There are other costs that can further lower your returns.

Recurring Costs: First, there are maintenance costs—not just the regular maintenance fees that most apartments charge, but also for painting, repairs and others—that you will have to bear. The annual property tax, depending on the city will get added to the annual cost.

Says Billimoria: “The costs of maintenance of flats are high considering depreciation on properties; hence, the real return an investor gets on rental properties is very low.”

Capital appreciation has also fallen drastically, leading to capital gains from the sale of property falling far below other financial instruments. “In the early 2000s, it used to be around the rate of at least 12-15 per cent per annum. Now the capital appreciation on real estate has reduced to about 8-10 per cent per annum,” Billimoria adds.

Second, renting out also has a cost. Since most rental agreements are for 11 months, there is always the possibility that tenants may shift after the tenancy period. This is also a constant drain, cost-wise, as, typically, owners need to repaint, carry out repairs and do deep cleaning, among other things, before putting out the house on rent again. The agent fee is a big chunk of cost at this stage. Typically, it’s 10 per cent of the rent in metro cities.

Other Risks

Exit Is Difficult: Exiting the investment can be a problem as real estate is an illiquid asset. You may not get a buyer or the right price when you need cash. Unlike stocks and bonds, which are traded more frequently and can be easily converted into quick cash, real estate investments are rather illiquid. This happens as there is a smaller pool of potential buyers at any given point in time for a cost-heavy asset.

Another challenge that real estate owners face when trying to liquidate their investment is determining the value of their assets. This happens due to lack of transparency in real estate prices, which are not readily available. These deals are often negotiated, which introduces subjectivity and discrepancies in the valuation process.

Says L.C. Mittal, director, Motia Builders Group: “There are huge illiquidity premiums; you don’t get out of real estate quickly like with securities. The exit process could take months of negotiation and piles of paperwork. If you are an investor who is only buying to rent out a house, the 3-4 per cent rates of return might not be enough to justify the risk factors.”

The challenge of illiquidity becomes more pronounced when investors wish to reallocate capital or need access to funds for quickly changing financial circumstances.

Managing Tenants And Squatting: The renting process may not be as simple as it sounds. Depending on the tenant, you may face problems of irregular rent, wear and tear of the apartment and mishandling of gadgets and fixtures, and even illegal occupation in extreme cases.

According to several media reports, tenants have acted in bad faith and tried to usurp the property by way of squatting. “Squatting refers to tenants refusing to vacate the property once their rental agreement expires and continuing to stay there without paying rent,” says Avnish Sharma, partner at full-service law firm Khaitan & Co.

He adds: “Homeowners in India often face significant challenges when tenants act in bad faith, particularly given that tenancy laws tend to offer considerable protection to occupants. A prevalent issue is squatting—where tenants exploit procedural delays to continue unlawful occupation without paying rent.”

Earlier this year, the Supreme Court gave out a landmark judgment in the Krishna Kumari v. Mahesh Chandra Tripathi case involving squatting and directed the tenant to vacate the property. However, the legal process lasted for six decades and involved two generations.

“In Krishna Kumari v. Mahesh Chandra Tripathi (2025), the Supreme Court, after a protracted 60-year litigation involving two generations, ordered the eviction of the tenant from the landlord’s property in Lucknow. The court upheld the right of the legal heirs to continue eviction proceedings on grounds of bona fide requirement, reinforcing that long-term possession cannot override the landlord’s legitimate need,” says Sharma.

Often the renting-out process becomes difficult on account of non-payment of rent and fabricated complaints against the owners and can even extend to the tenant engaging in illegal activities or making structural alterations which, in turn, can attract municipal penalties and criminal consequences.

How To Protect Yourself

Real estate investors can safeguard themselves to an extent from landlord-tenant conflicts by proactively managing their legal agreement. Some basic checks which all landlords should perform involve scrutinising key details of the tenant, such as their identity documents and their proof of employment and income. It might be helpful to also note their work address. Don’t forget to draft a legal agreement, which clearly lists out the payment amounts and timings in detail along with the late payment dues and other clauses, such as restrictions on sub-letting and maintenance obligations.

“The foundation of a secure tenancy is a well-drafted rent agreement that is adequately stamped and duly registered (if applicable) with the local sub-registrar. This registration not only adds legal validity, but also strengthens your position in case of disputes or eviction proceedings,” says Sharma.

The agreement should explicitly mention clauses which restrict the commercial use of the property and should also include a clause which allows the landlord to periodically visit the rented accommodation to check its state.

Adds Sharma: “Restrict subletting, commercial use (such as registering the property as a business address for Goods and Services Tax or GST or other licences), and running paid guest accommodations without your prior written consent. Also, include a clause permitting periodic inspections of the premises with reasonable notice to the tenant. This provision allows early detection of unauthorised alterations.”

Michelle Solomon Le Page, a partner at Solomon & Co. a full-service law firm based in Mumbai, told Outlook Money that apart from a rental agreement, landlords can also consider signing a leave and licence agreement, especially when putting their property on rent for shorter durations. She adds that the process of evicting a licensee is quicker than the process of evicting a tenant.

Says Page: “A rental (tenancy/rent agreement) gives the tenant exclusive possession of the property, while a licence (leave and licence agreement) only allows temporary use, with the homeowner keeping legal control of the property. For shorter stays, where control is retained with the homeowner, a leave and licence may be the better option. For longer commitments, a rental agreement may be suitable. However, keep in mind that evicting a licensee is quicker and easier than evicting a tenant since a tenant has many statutory rights compared to a bare licensee.”

If you think you can surmount and manage the various issues related with real estate investment and are still looking for a regular rental income, ensure that your dream doesn’t turn into a nightmare.

Dealing with the tenant professionally, while being aware of your rights and the legal loopholes, and having backup investments for emergencies can help.

ayush.khar@outlookindia.com