When putting up a property for rent or estimating the amount to be paid monthly by the tenant, the term rental amount comes up. But what does it mean?
Rental amount, also called rental value, refers to the sum of money that one has to pay for the temporary use of particular items, equipment, and services. Generally, its payment ensues weekly, fortnightly, monthly, or periodically.
Now, it is evident that one cannot determine the rental amount of property at random. Additionally, it can be neither too high nor too low to avoid putting off prospective tenants and incur losses for the landlord, respectively. The rental value depends on several factors that directly influence its rise and fall. In this article, let us have a look at what they are.
- Market Value of the Property
The market value measures the current standing and significance of a particular property in the real estate market. Suppose the acreage in question lies in an area or neighborhood with multiple public facilities and amenities like metro stations, convenience stores, hospitals, train stations, and so on. In that case, it will inevitably be in high demand. These factors would make the potential leaseholders appreciate the worth of the property, allowing its value to rise in the charts.
On the other hand, elements like increased pollution levels, a decline in safety, and stalled infrastructure projects in the vicinity of the property can result in a decrease in its market value. Subsequently, its rental rate or value would also drop.
- Prevailing Rental Rate
It would be strikingly eye-catching and off-putting for probable renters if the rent of a specific property is considerably higher than the rest around it. Too low a price would also defer tenants as they would believe that something is wrong with it. Thus, it is imperative to consider the entire area’s rental rate before setting one for a new house or land.
However, this comparison and reference must only be done to and taken from similar properties. For this purpose, one can take into deliberation the following characteristics:
- Number of bedrooms and bathrooms
- Year of building and most recent remodeling
- Lot size
- Included facilities
Additionally, the money spent behind mortgages, maintenance, tax, and repairs, which owners have to pay when the property is left unoccupied, should be contemplated.
- Extra Amenities
Properties with additional facilities like parking spots, verandas, swimming pools, gardens, and so on will, without a doubt, command a higher rental amount. Furnished or semi-furnished houses with cupboards, fans, storage space, kitchen appliances, and beds will go for and fetch more rent than the non-furnished ones.
- Rental Rate
Rental rates estimate the suitable and acceptable amount of rent that a property occupant can and would have to pay. It lies at about 2.5% to 3.5% of the acreage’s market value.
However, the rental rate may differ depending on the property’s demand and supply disequilibrium. Nevertheless, the maximum and minimum values should not exceed 3.5% and 2.5% of the market value, respectively.
Ways to Value a Real Estate Rental Property
Primarily, there are five ways to determine the rental amount of a property after considering all the associated factors. They are:
- The Sales Comparison Approach (SCA)
- The Income Approach
- The Capital Asset Pricing Model (CAPM)
- The Gross Rent Multiplier Approach (GRM)
- The Cost Approach