If you have invested in a property, with the aim of earning rental income from it, how do you decide how much rent to charge for the property? We offer some general guidelines
Home owners often find it difficult, to figure out the right balance between their property’s price and its rental potential. “People often invest in properties, for the regular rental income that they can derive out of it. This may make it difficult to decide how much to charge for your property because while you want to make money out of your investment, you do not want the rent to be so high that your property has no takers. At the same time, the quoted rental is too low, people may wonder if there is something wrong with the property. So, it is essential that you price your property accurately, so that you can attract tenants, without having to compromise on returns from your investment,” says Adhil Shetty, CEO of BankBazaar.com.
Factors that impact the rental pricing of a house
Shetty cites several factors that influence the rental price:
Size of the property: Bigger the property, higher would be the rent.
Layout: A 900 sq ft 1-BHK might have a slightly lower rent than a 2-BHK of 900 sq ft, because of the layout that offers more independent space.
Amenities: A 1,000 sq ft apartment in a gated community with enclosed car parking, swimming pool, clubhouse, etc., would fetch a higher rent, compared to an apartment in a single building.
Internal fixtures and facilities: A home with a modular kitchen, appliances, wall cupboards, storage space, etc., will usually command a higher rent.
Location of the property: The part of town where the property is situated, its proximity to schools, hospitals, etc., and access to transport facilities, all play a part in determining the rent. The competition, in the form of the number of rental properties in that area and the market demand for rental property, also affects the rental amount.
How to get the right rental income?
Experts point out that residential rental yields range around 2.5 per cent to 3.5 per cent, in most places across the country. There are some exceptions, depending on the demand and supply for quality housing, in new or emerging suburbs. Also, the effective post-tax interest cost on a home, should be approximately 3.5 per cent, because you get tax deduction on interest payments and principal repayment.
According to Vinod Menon, director and CEO of Citrus Ventures, “Some easy strategies, to boost your rental yield, are:
- Furnish your home. An additional Rs 5-lakh investment on the home’s interiors, can deliver 0.5 per cent higher rental yield.
- Invest in smaller 3-BHK, instead of a larger 2-BHK, as it will give you the option to rent the house to, say, three bachelor friends, thereby, yielding better returns.
- Select well-maintained housing societies with reasonable amenities, so that the maintenance outgo is not significant.
- Work with reliable brokers who are strong in the local area, to ensure that the vacancy period is minimum.”
Setting the right rents will ensure that your property is rarely vacant. This means continuous revenue. Keep an eye on the market demand. When the demand is high, you can charge a higher rent. When the demand is muted, you may have to lower the rent to attract tenants.
Market factors that affect rental price
- Demand and supply in the micro-market.
- Location and capital value of the asset.
- Comparable prices in the market.
- Tenant profile in the area.