How to determine the rental value of your house?

The opportunity to earn a steady and attractive rental income is among the key reasons why people prefer to invest in a property. Owing to factors such as fast-developing infrastructure and high demand for properties, the rental values in a neighbourhood are appreciated. However, the rental market trends may change due to various factors, and this has an impact on the rental rates of a property. Determining rental value by considering the market trends is crucial for a property owner looking to earn good rental returns. It helps in other ways, especially in terms of investment analysis and to avoid undervaluing rental rates. In this article, we share the method to accurately estimate the rental value of your house.

What is the rental value?

The rental value of a property refers to the estimated value or fair market price, which a property owner could generate by letting out or renting the property to tenants. The rental value is determined based on several factors, such as property size, location, amenities in the area, demand for properties, etc. In taxation terminology, rent is referred to as standard rent and is the price that a landlord can charge for a property under the Rent Control Act.

Why is property valuation important?

Property valuation is a crucial aspect of the property buying or renting process. For landlords, it helps estimate competitive rental rates and earn sound rental returns in a year. As a property owner, fixing the rental price directly impacts your financials. Property valuation involves estimating a property’s selling price, rental value and market value using various methods.

A property owner may incur several costs before renting out a property. These may include renovation or repair costs, monthly home loan EMIs, brokerage fees, etc. If the property has been vacant for some time, then the owner must bear the regular maintenance costs. Considering the fixed and variable expenses of property ownership will help the landlord set a good rental value in line with the market rates. One should note that a higher rental value can turn off prospective tenants. On the other hand, a lower rental value can imply losses for a landlord. Moreover, a property’s rental value may change based on market conditions. Thus, calculating the rental value periodically will enable the landlord to make an informed decision.

Factors impacting the rental values of a property

• Location: This is one of the key factors influencing rental rates in an area. The presence of social infrastructural facilities such as schools, shopping complexes, medical facilities, public transportation, etc., will determine the rent. Moreover, proximity to offices, commercial centres, and business districts typically results in higher rent due to high demand.
• Infrastructure developments: The development of expressways, flyovers, metro, etc., positively impacts the real estate market by boosting connectivity across regions. It drives overall economic growth, creating job opportunities and attracting tenants. This leads to an increase in rental rates.
• Supply and demand: The availability of rented properties and the demand by prospective tenants in the neighbourhood affect rental prices. Landlords tend to increase the rent when the demand surpasses the supply of properties, while the rates are lowered when if there is lesser number of prospective tenants.
• Property type, size and layout: Spacious homes with well-planned layouts located within gated communities are sought-after property types since they aim to meet the evolving lifestyle needs of home seekers. These properties attract higher rent if there are additional amenities such as parking, swimming pool, gymnasium, etc. Similarly, rental rates differ for furnished, semi-furnished and fully furnished homes.
• Property conditions: Well-maintained properties located in a well-developed neighbourhood are more desirable and the rental rates tend to be higher. On the other hand, older properties generally have lower rental rates. Moreover, if any upgrade has been made in the property, such as a renovated kitchen or a rooftop solar panel, landlords set a high rent as these features enhance the property value.

Steps to determine the rental value of your property

Research rental rates in the neighbourhood

Assess properties similar to your property in the same neighbourhood to get a sense of the current market trends. Consider assessing their condition and how they are staged and find out their listed prices. You can refer to online real estate portals or newspaper listings to check the rental rates of these properties. This will enable you to arrive at an appropriate price for your property. A considerable difference between the market rental rate and the rent a landlord sets could make potential tenants move to other property options offering lower rates.

Study market trends

The rental values in a location are influenced by market trends and demand-supply dynamics. Landlords planning to rent out their homes should consider factors such as average rental prices, vacancy rates, tenant demand and the type of rental properties popular in the market. They can compare the rent of similar properties in terms of area, number of bedrooms, age, etc. Similarly, some types of properties could be more in demand but may be in limited supply, resulting in higher rent.

Some property owners demand high rent if the house has been vacant for a long time. When assessing market trends, landlords must understand how factors such as population growth, employment opportunities in the area and upcoming infrastructure projects can impact property demand and rental rates. They must assess any fluctuations in rental values and adjust the rent accordingly.

Evaluate your property

When determining rental rates, landlords should consider the size of the property – the floor area, the number of bedrooms and bathrooms, floor level, parking space, etc. In addition to this, it is important to note if the property is in a standalone building or a gated community with security measures and modern amenities. For example, the rent of a spacious 2BHK apartment in a gated society will attract higher rent than a 3BHK apartment in a standalone building. Moreover, well-maintained properties will command a higher rent as potential tenants may not be willing to pay a high amount for properties in poor condition. Landlords can charge premium rent if their properties come with energy-efficient features, smart appliances, etc.

Assess the neighbourhood

Landlords are at an advantage if their property is in proximity to schools, parks, medical facilities, shopping centres, public transportation and other amenities. The demand for such properties tends to be higher than for properties located in far-flung and less-developed localities. Furthermore, if there is an upcoming infrastructure project, such as a flyover or a metro project, the rental rates are likely to appreciate. At the same time, the market rental values tend to decline owing to stalled infrastructure projects or other factors such as traffic congestion, water supply issues, etc.

Calculate rental yield

Rental yield or rental returns refers to the returns a property owner receives by renting it out. The annual rent as a percentage of the market value of the property. Knowing the rental yield in an area enables potential investors to make an informed decision about choosing a location for buying a property by comparing rental returns and arriving at the right rental value.

Rental yields are of two types:

Gross rental yield

The gross rental yield is the return calculated by only considering the total rent. It does not include the expenses on the property incurred by the landlord during the year. It is calculated using the formula:

Gross rental yield = (Annual rent/ property value) X 100

Net rental yield

The net rental yield includes the returns calculated by subtracting expenses such as maintenance costs, property taxes, insurance premiums, etc. Thus, it is a more realistic picture of how much returns the landlord can expect from the property.

It is calculated using the formula:

Net rental yield = (Annual rent – annual / property value) X 100

For example, the monthly rent for a property is Rs 50,000 and the property value is Rs 1 crore. The landlord incurs annual expenses of Rs 1 lakh.

Gross rental yield = (Annual rent/ property value) X 100

= (50,000 X 12/ 1,00,00,000) X 100

= (600,000/1,00,00,000) X 100 = 6%

Net rental yield = (Annual rent – annual / property value) X 100

= (600,000 – 1,00,000/1,00,00,000) X 100 = 6%

= (5,00,000/1,00,00,000) X 100 = 5%

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There are some key factors that landlords should consider when calculating rental values, which include prevailing market rent of similar properties, demand and supply, amenities available in and around the building, property’s condition, etc. To attract potential tenants and earn a high rent than similar properties, it is essential for landlords to make some smart decisions. This could include making small changes in the property’s features, such as installing new cupboards, upgrading kitchen appliances, installing modern bathroom fittings, etc. These efforts can go a long way in retaining tenants for a longer term.

Landlords can also consider approaching an experienced real estate agent or professional property valuation service providers to assess the market trends and determine the right rental value for their property.

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