Should you buy a second property for “rental income”? A reality check on yield, vacancy, and taxes

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• Rental yields in India often fall below 2 percent after expenses and taxes
• Vacancy, taxes, and loan costs can erode rental income further
• Owning a second home is not a guaranteed source of steady income

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Buying a second home to “live off the rent” is one of the most persistent ideas in Indian personal finance. The logic sounds simple. Property feels tangible, rents feel predictable, and owning an extra flat feels safer than market-linked investments. But rental property is not a guaranteed income machine. It is a business, with costs, downtime and tax leakage that many buyers underestimate.

Before you sign up for another home loan, it helps to run the numbers without romance.

What rental yield really looks like

Most residential properties in Indian cities generate gross rental yields of around 2 to 3 percent a year. That is the rent you collect before expenses, expressed as a percentage of the property’s market value. In some micro-markets or older properties, yields may stretch to 4 percent, but those are exceptions.

Once you subtract maintenance charges, property tax, brokerage, repairs, society contributions and occasional upgrades, the net yield is often closer to 1.5 to 2 percent. That is before tax.

Compare this to the interest you pay on a home loan, which for many buyers still sits well above 8 percent. If your rental income does not even cover the EMI, you are effectively subsidising the tenant every month in the hope that capital appreciation will bail you out later.

Vacancy is not an edge case

Most rental calculations assume full occupancy. Real life rarely cooperates.

Tenants move. Buildings age. Demand shifts across neighbourhoods. Even a one- or two-month vacancy every year can knock another 15 to 20 percent off your effective annual yield. Add brokerage fees for each new tenant and the numbers thin out further.

Vacancy risk is higher if the rent is ambitious, the location is over-supplied, or the tenant profile is transient, such as students or short-term corporate renters. Rental income feels “regular” only when you ignore how fragile it actually is.

The tax drag most people miss

Rental income is fully taxable at your slab rate after a standard 30 percent deduction for repairs and maintenance. There is no inflation adjustment. There is no preferential rate.

For someone in the 30 percent tax bracket, a 2 percent net yield drops closer to 1.4 percent after tax. If you are still servicing a loan, the interest deduction helps, but only partially, and only up to certain limits depending on how the property is classified.

Capital gains tax is often cited as the payoff, but that assumes strong price appreciation and a clean exit. Transaction costs on sale, long holding periods, and uncertain market cycles can dilute those gains.

Appreciation is not guaranteed

Many second-home buyers quietly rely on price appreciation to justify low rental returns. That worked well in certain phases of the past. It is far less predictable today.

New supply, changing work patterns, infrastructure delays and regulatory shifts have made residential appreciation uneven. Some properties stagnate for years. Others barely keep pace with inflation. If appreciation does arrive, it is lumpy, not annual, and cannot be used to pay monthly bills.

When a second rental property can still make sense

A second property can work if it is largely debt-free, bought at a genuine discount, and located in a rental market with stable demand. It also works better as part of a diversified balance sheet, not as the cornerstone of retirement income.

If you enjoy managing property, can handle tenant issues, and are comfortable with uneven cash flows, it may fit your temperament. But that is a lifestyle choice as much as a financial one.

The quieter alternative

For many investors, the desire behind a rental property is not bricks and mortar. It is steady income. That outcome can often be achieved more efficiently through instruments that offer better liquidity, clearer taxation and less effort.

A second home can still be an asset. Just don’t confuse ownership with income certainty. Rental property rewards patience and capital, not optimism alone.