Creating a Portfolio of Rental Properties – How the law can help you in owning and managing them

Housing Society Law

Posted by Aditya Pratap Law Offices on 01 Mar 24

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Passive income from a rental property is a good way to augment your regular
income from a job, business or profession.

In India, most property rental transactions are carried out through the leave and licence mechanism. In this system, the property owner is called the licensor while the renter is called the licensee. For reasons of convenience, we will be using the terms owner and renter respectively.
 

How to protect your rental income?
The best way to protect rental income is to have sufficient safeguards contained in the rent agreement. For instance, there should be a substantial security deposit. By the second month, the rent amount can be collected by means of post-dated cheques realized from the renter. When the rent agreement is signed, a small list containing the serial numbers of all these cheques should be attached to the agreement and circulated on record between both parties to avoid ambiguity.

How to evict a renter who defaults on his payments?

If you are in Maharashtra, the legal procedure in dealing with every defaulting renter or tenant is to file an eviction suit under the Maharashtra Rent Control Act of 1999. This is usually filed in the Court of Small Causes in Mumbai city. For other districts in Maharashtra, it can be filed in the Court of the Civil Judge, Senior Division.

How to prevent damage to the property?
Usually, the time-tested method of preventing occupants from damaging the owner’s premises is the security deposit. Rent agreements should expressly stipulate that the security deposit will be returned to the tenant only after the owner or the landlord has inspected the premises and is satisfied that no repairs are required.

What about the right of the landlord to inspect the property?
It is advisable for the owner or the landlord to inspect the premises at regular intervals in order to ensure that repairs and upkeep are carried out. While carrying out the inspection the owner must ensure that the property is being used exclusively for the purpose as specified in the agreement. For example, a
residential flat should be utilized only for residential purposes and not for opening a shop or an office. Should there be any violation of the terms and conditions of property usage, the landlord must immediately issue a notice to the tenant to stop the same or vacate the premises.

When can a landlord forfeit the security deposit?
The security deposit is collected by the landlord from the tenant for two purposes. Firstly, it acts as a buffer against any default in the payment of rent by the tenant. If the tenant fails to pay the rent due each month, the landlord can deduct the same from the security deposit after giving him advance notice.
Secondly, the security deposit also serves as collateral against any damage that may be caused to the property by the tenant to the furniture, fixtures, fittings and plants that usually come with the premises. The landlord can deduct the cost of repairs from the security deposit after giving advance notice to the tenant. Very often the damage caused to the flat does not become apparent till the time the tenant has left the property after the expiry of the licence period. In such a case the landlord should delay the return of the security deposit till the time he has personally verified and Inspected the flat. A specific provision can be made in the leave and licence agreement to this effect so that there will be no bitterness or
dispute between the parties.

How does one manage a property that has been rented out?
When a person has a number of properties that have been rented out, management of the same can become a tedious affair. To efficiently manage such a portfolio it is advisable to appoint a manager who can deal with all issues on behalf of the landlord.

What are the tax implications of rental properties? Will rental income be taxed?
The Income-Tax department has a specified head of income titled “Income from House Property”, to tax the rent received by the owner of a property. So any rent received with respect to a residential house as well as commercial property, is taxable under this head. The property is taxable on the basis of its annual value.

Aditya Pratap is a lawyer and founder of Aditya Pratap Law Offices. He practices in the realm of real estate, corporate, and criminal law. His website is adityapratap.in and his media interviews can be accessed at http://www.youtube.com/@AdityaPratap/featured . Views expressed are personal.