Accruing rental income from your property could be a challenging task. Homeowners need to calculate the accurate rental value for their premise in accordance to the market rate. Majorly, there are three factors that you need to consider before finalising the rental value for your home suggests tips to determine and nail down the ideal rental price for your property.
Factors to consider while calculating the rental value of a property
Rental rate
Annual rental yields of a residential property vary between 2.5 percent and 3.5 percent of the market value of the property. So, the most important question people pose is how to calculate rent basis the rental yield! For instance, if the market value of your property is Rs 30 lakh, then its monthly rental value will range from Rs 6,250 to Rs 8,750.
Here is how to calculate the rental value of a property-
In the case of 2.5 percent rental yield
(Rs 30 lakh*2.5)/100= Rs 75,000 per year
So, the monthly rental will be Rs 75,000/12= Rs 6,250
In the case of 3.5 percent rental yield
(Rs 30 lakh*3.5)/100= Rs 1,05,000 per year
So the month rental will be Rs 1,05,000/12= Rs 8,750
However, in some cases, the valuation may differ owing to demand and supply disequilibrium. Suppose the property is in a category high on demand, but witnesses limited supply or any other positive external factor comes into play. In that case, the rental rate can go as high as 3.5 percent of the property but should not exceed it. On the contrary, if the demand is low, the rental rate should be 2.5 percent of the property value.
Market value of the property
Market value is the current value of the property in respect to underlying forces. There are several factors that might impact your property’s market value, such as infrastructural development. For instance, any flyover, park, or a metro link being developed has the potential to appreciate the property’s value and will eventually help you command a higher rental rate. Additionally, the chances are also that current market value may decline owing to factors such as increased pollution level, stalled infrastructure projects, or decline in circle rates.
Therefore, it is essential to know the current market value of the property. However, if you find it difficult to quote a property value, consult a property appraiser to know the exact cost of the property.
Prevailing rental rate
Experts believe that it is also important to consider the amount charged by other landlords in your area. Ensure that the rental charged is in accordance with the rental rate of other similar properties in the locality. A considerable gap between the prevailing rental value in the area and your rental ‘ask’ might deter tenants and divert them to other options pegged at a lower rate.
Be considerate of the monthly mortgage cost and other costs of repair and taxes which you have to pay while the property is lying idle and accordingly decide upon the rental rate.
Consult property management services:
If you decide to hire a property management company to take care of the property, then make sure that the company has a good idea of determining the maximum rental value on your property. Otherwise, contact local agents and enquire about the rental prices in your locality to know what you should charge.
- Setting the right rent is one of the primary qualities required for a property management company. They have a better understanding of the local market and also compare the rates within similar properties.
- Working with local agents:
- Agents who deal with rentals have a keen understanding of the local rental market. They are familiar with all of the vacant and occupied rental properties. Based on this knowledge they assess the positives and negatives of your property and set an appropriate rental price. Being an agent they get to meet many tenants and can analyze how much the tenant can pay for a property.
- Most real estate agents do not deal with rentals, although some might. So you might want to contact a rental agent or hire a property management company in your area, as they tend to specialize in rental properties.
Calculate the rental price per square foot:
If you cannot find a similar property then you can determine the rental value by calculating the rental value per sft.
- To calculate the rental price per sq ft, divide the rental price by the total area in sft. For example, if the property has an area of 1100 sft and the rent charged is 10000 INR. The rental charge per sft can be calculated with the equation 10000/1100 = 9.10 INR.
- Apply the per sft rental value from the above equation and calculate the rental value of your property.
Research on rental prices for similar properties:
Find out how much rent are others charging for similar properties in your locality. Visit websites like magic bricks and 99acres. Try to go around and visit some properties which are not on the sites to get a hang of the actual charges.
- Look for units that match your property in terms of size, number of bedrooms & bathrooms, age, upkeep status, etc.
- Make a list of properties that best match your property and find out the rental charges and occupancy rate. Assess how much you can charge when compared to the other prices, based on advantages and disadvantages.
- Always keep in mind that the advertised rental price might be too high. Some owners charge high rent for properties that are vacant for a long time. Take this into consideration when setting up a rental value of a property.