Rental income against EMI

Rental income from real estate

Many suggest to buy a property with a 20% down payment, finance it with a mortgage, and then rent it out to cover the monthly EMIs. In this scenario, the rental income covers your EMI payments, making it seem like the property is "paying for itself." Over time, you may feel like a savvy investor—believing that your property’s value is appreciating, you’re not paying EMIs out-of-pocket, and, after 20-25 years, the property will be yours without much personal expense.

But how realistic is this?

This idea is often encouraged by well-meaning family members—parents, in-laws, or even a spouse—who view property as a safe investment. However, the reality is more complex. Consider factors like rental market fluctuations, property maintenance costs, vacancy risks, and mortgage interest over the loan term. Additionally, the appreciation of property values isn’t guaranteed, and, in some cases, your net profit may not be as high as anticipated.

Additionally, rental yields in many areas are modest, usually hovering around 2-3% annually, while mortgage rates often range much higher around 8.5%. This gap means that, unless the property appreciates significantly over time, the “self-paying property” idea may fall short of expectations.

So, while this strategy sounds appealing, it’s important to carefully evaluate whether it will genuinely achieve the financial freedom and returns you envision.

Does this strategy really work as intended? Can rental income consistently cover EMI expenses? The short answer: it's complicated. The long answer: yes it does, but after certain years.

Typically, rental yields are lower than the EMI costs. If you come across a property where the rent truly covers the entire EMI, stop reading this and buy that property immediately—and don’t forget to call me right after! But in most cases, the rent will fall short of the EMI, meaning you'll need to contribute additional money each month.

Various factors are assumed as per current economic scenarios. This should be considered as just a blueprint, various other costs might involve like stamp duty, registration fees, brokerage commission, taxes, and yearly maintenance costs are exempted for the purpose of calculation.

Consider this example below

Property value: 1 crore

Loan amount: 80 lakhs

EMI on loan: 64400 per month/7,75,000 per annum.

Rental income appreciation is considered to be 5% per annum.

As you can see from this chart it is clear that at the beginning, the rental income covers the 52% of EMI and remaining amount has to be self sourced. Considering a moderate rental yield to be 4% per annum at the beginning, it will take 15 years to breakeven. After 15 year your rental income will cover the EMI expense and cashflow will starts after 15th year. In another instance, With rental yield of 5% per annum at the beginning, it will take 10 years to breakeven. Cash flow will start after 10th year. Rental yields are different in different locality, so one can safely say, it will take 10 to 15 years to become cash flow positive where rental income will cover the EMI expense. Meanwhile the value of property will also appreciate over the time considering a moderate growth of 5% to 7% per annum. So overall growth will be around 10 to 12%. Considering 5% rental income and 7% property value appreciation.

Another way is if possible, use the extra cashflow to pay off debt earlier and become debt free before 25 year. But if you understand debt and how to use it invest in another commercial properties for more cash flow.

In my opinion debt is good, if you know how to use it. Considering the time value of money and purchasing power of rupee into the account one is actually paying less than before. But most of the masses think they are paying much more extra from their pockets as interest payments. Debt is actually good if you know how to use it. And invest in high return assets. Inflation plays a significant role in destroying the purchasing power of the money. This is called inflation induced debt destruction, which will be covered in much more detailed in our next blog.

Till then keep enjoying and tune in for more from Aprameya!.