How to determine the rental value of a property

Before getting into rental real estate, ambitious landlords and real estate investors must learn how to calculate rental income flow. After all, rental income cash flow is a rental real estate business's lifeline. But how do you determine the rental income of a property? Fortunately, estimating rental income flow is simpler than you would think.

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How to determine the rental value of a property

Rental real estate is an excellent method to generate rental income and build wealth. But, first-time investors must understand how to research and pick properties. Buying your first rental property is a significant financial investment, so be sure you know what you’re doing. Acquiring rental income and revenue from your house is an undertaking. It not only necessitates the required repairs and modifications to make the property appealing to renters, but it also deduces a rental value that is in line with market sentiment. Though this is vital when considering acquiring a rental property, you should also be aware that rentals provide an expanding stream of cash like a consistent means to generate money. Above all, one should consider how one would evaluate rental income before going into the game of real estate rentals.

So, what is rental income?

Rivers flow, energy flows, and blood flows – wouldn’t it be amazing if money flowed as well? Oh, but it does! The beauty of real estate investments in their rental income flow. If you’re not aware of the notion, rental income comes in every month without you having to work for it. It is generated by investments or assets that generate cash flow. That rental income is also known as passive income.

When you buy and keep a rental property investment, you generate rental income. Then, once a month (or quarterly, or yearly), that rental property investment pays you back the money. Therefore, rental property investors often do not want to sell because they want to continue receiving the continuous cash flow income.

Also, read How Much Is The Average Rental Income in Top Indian Metropolitan Cities.

For example, if you buy a stock, that will create money for you in the form of a dividend for as long as you possess it – that’s cash flow. Let’s imagine you buy a single-family house and, instead of sprucing it up and selling it, you decide to rent it out. You collect the rent and pay the bills, including the mortgage, once a month. You will earn if you purchase it at a reasonable price and manage it correctly (positive cash flow).

The purpose of rental income is to alleviate the concern of running out of money in retirement. Also, your rental income will flow like clockwork as long as you hold the asset. It’s also the least taxed kind of income. Finally, there is no waiting time – you can begin earning rental income as soon as you find a tenant for your house.

What are the best rental income properties in India?

Now that we understand what rental income is and its significance. Let us now see the best rental income properties for you to invest in India to reap higher rental income.

Co-living models

Real estate in India has an untapped demand from millennials searching for co-living housing. It covers both the student community and migrant working professionals between the ages of 18 and 35. Millennials account for over 30% of India’s population, so if you’re wondering, ‘real estate where to invest,’ investing in co-living housing provides both demand and potential.

Also, read Trending Real Estate: Why Coliving Models Are A Hit In India.

Rental housing

The demand for rental housing is likewise big and more acute for the country’s low-income groups. Rental accommodation is the only choice for daily wage earners and migratory employees from the informal sector. According to government statistics, between 26 and 37 million households in metropolitan India live in informal housing. As a result, investment in India’s inexpensive housing market generates better profits. 

Commercial real estate

Rental income is a significant component of real estate investments. However, commercial real estate outperforms residential buildings in terms of attracting rental income gains. Commercial properties are far more expensive than residential buildings in terms of initial capital needs. However, investors who wish to participate in commercial buildings but lack funds can now invest through fractional ownership. Also, the average rental income yield for commercial real estate properties is 6% to 10% per annum. 

Also, read Residential Vs. Commercial Properties: The Rental Income battle.

But, how do I determine the rental value of a property?

Knowing how to do the math on the rental value of a rental property might make the difference between a profitable investment and a money hole. Even if the rental market has ups and downs, understanding how to evaluate your prospective rental income return on investment will help you better estimate your odds of success.

Also, read How to Determine Your Rental Property Value? – Top 10 Ways.

  • Initial Investment: When estimating your expected rental income, you must consider your initial and ongoing costs. Your first investment would most likely comprise a down payment, interest rate, closing charges, and any repairs required to make the rental suitable for occupancy.

  • Expenses: To assess whether or not becoming a rental property owner will be beneficial for you, you must analyze your rental income by evaluating your initial and continuing costs against your predicted rental revenue. A mortgage payment, homeowners association fees (HOA), taxes, and property maintenance are all continuing costs for rental houses. In terms of taxes, you must also ensure that you are aware of any tax breaks that you may be entitled to as a rental property owner.

  • Market rents: Rather than basing your rent on your expenditures, you should research to see what comparable houses in the region are renting for and then adjust your rent appropriately. When assessing fair market rent, you should also take supply and demand into account. If there is a great demand, you may be able to charge a higher rent. If the home is already rented, you will have a fair sense of the annual rent. Otherwise, you may approximate this number using market rentals.

Therefore, determining the rental income of your property can help you estimate whether or not a property will provide a positive cash flow. However, market fluctuations or evictions can have a significant impact on your actual rental income. Therefore, finding reputable renters that pay their rent on time, follow the agreement, and take care of your property can increase your chances of making a profit.

Do you want to invest in real estate in an affordable way? Check out Assetmonk, a new-age investment portal that will assist you in locating the finest property offers. It is a WealthTech Platform that offers rental investments with IRRs ranging from 14 to 21% in places like Bangalore, Chennai, and Hyderabad.

How to determine the rental value of a property FAQ'S:

The rental income on a residential property ranges between 2.5 and 3.5 percent of the property’s market value. For example, if the market value of your home is Rs 30 lakh, the rental value will be between Rs 7,5000 and Rs 10,5000 a month, with monthly values ranging from Rs 6250 to Rs 6750. However, due to demand and supply imbalance, the valuation may change in some circumstances. If the property is in a high-demand category with limited availability, or if any other favorable external factor comes into play, the rental rate can go as high as 3.5 percent of the value but should not surpass it.

You must determine the rental income of a property by calculating the gross annual value of the property.

Investing in a rental property might be an excellent method to generate money in real estate. However, not all rental properties are viable investments in real estate. As a result, as a real estate investor, you should carefully assess a rental property before purchasing it to assure its profitability. Here are 11 methods to help you evaluate a decent rental home — both subjectively and statistically.

1) Investigate the local economic market trends.

2) Examine the Surrounding Area

3) Investigate the Local Real Estate Market

4) Examine the Local Regulations

6) Examine the Physical Features and Amenities of the Property

7) Arrange for a home inspection.

8) Adhere to the 1% Rule

9) Calculate the Cash Flow

10) Calculate the Cash on Cash Return.

11) Calculate the Cap Rate

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