There are very few investments that are as widely used by people seeking a sound financial future as real estate is. When we go to buy real estate there is always the big question: should I focus on the steady monthly returns of rental income or on property appreciation over a longer term?

Each strategy has its own rewards and risks. While some investors may prefer the regular cash inflow received from rent, others may be more focused on property appreciation and making profit in the long term. Both methods of earning from real estate can be successful depending on an individual’s financial aims, risk appetite and investment duration.

What is Rental Income?

Rental income is what you earn over a long term from tenants living in your property (an independent house, an apartment, an office space or a commercial space). This is best suited for people seeking steady monthly returns and wanting to generate an income that might help them pay off loan EMIs or just put extra money into their pockets, or simply make an addition to their income.

Pros of rental income

• Steady income: The greatest advantage of rental income is the fixed sum of money you can expect each month.
• Passive income source: Real estate investment through a rental property can act as a steady source of income even once the property is bought.
• Less dependent on the market: A rental property can offer returns even if its price does not move upwards but rentals do.
• High rental demand in India: In many rapidly developing Indian cities there is an ever-increasing need for rental accommodation among those who are moving from rural areas to cities, among student populations or business individuals. Areas around office complexes, metro stations and in busy cities can always guarantee a consistent demand from tenants.

Cons of rental income

• Property maintenance will eat into your returns, along with other expenses incurred on it.
• Sometimes, it may not be that easy to find the right, genuine tenant.
• Periods of vacancy will lead to no income in that period.
• Yield of rental returns are relatively low in Indian cities when we talk about appreciation. Most of the residential areas have rental yields of around 2-4% annually, which for an investment focused purely on income may not appear enough to some investors.

What is Property Appreciation?

• Property appreciation is when the price of the property goes up over a long period. Investors focused on appreciation purchase a property in a place which has the potential to grow in the future, and then sell the property at a higher price at a later stage.
• Property values change due to various factors, which can include developing infrastructure, change in location, improvement in quality of life etc.

Pros of property appreciation

• High returns: The potential for returns from property appreciation can be exceptionally high, particularly in emerging markets.
• Wealth creation: A property that appreciates greatly is a substantial creator of wealth over the long term.
•  Inflation protection: A rise in inflation leads to increase in construction costs, land values etc. Which indirectly causes property values to rise.
• Growth opportunities in new and emerging markets: tier-2 cities, areas near metro extensions, smart cities often have a massive potential to create property value gains.

Cons of property appreciation

• The property might remain undervalued for several years, especially in a slowing market.
• The economy may falter, decreasing the overall demand for property.
• The time horizon for getting significant benefits may be much larger in case of property appreciation as compared to investment on rental income.
• Limited liquidity compared to other investments.
• Additionally, without a tenant renting your property, you won’t be making income while you wait for the value to grow.
• Which strategy generates better returns?
• The right strategy for you depends on what your main objectives are from the investment.

Rental income is ideal for

• Investors seeking a predictable stream of income.
• Retirement investors seeking an income-generating passive asset.
• Buyers that want stability in their investment.

Property appreciation is better for

• Long-term investors willing to wait longer for capital gains.
•  Investors who want to purchase in locations that have growth potential and high future returns.
• Buyers who want to build wealth and can tolerate the ups and downs of the property market.
• It is possible to combine both strategies for greater returns. By buying a property that offers a good monthly income along with the potential to grow its value over time, you achieve the best of both worlds. Commercial properties often command higher rental yields as well as appreciation, while residential properties that are close to good infrastructure are both rented and appreciated.

Points to remember when investing in real estate

• Location: This factor plays the most crucial role while selecting real estate.
• Investment duration: Are you seeking returns over the long term or immediate cash flow?
• Risk appetite: Are you someone that likes to play it safe, or do you gambles for larger returns?
• Type of property: Do you want a commercial space that could give a higher rental income, or a residential space which grows steadier with time in a developed city.

Conclusion

Rental income and property appreciation both have their own merits and it comes down to your personal goals from your real estate investment. Instead of considering them as mutually exclusive, successful investors look for properties which provide good rental yields as well as have a potential to appreciate over time. Choosing the right investment strategy comes down to your financial goals, time span of investment and the real estate market at that particular time.

Smart real estate investment can lead to sustained income generation, wealth creation and financial security for years to come if planned carefully and after thorough market research.