Pricing a rental property is an important part in investing in real estate. Setting the price too high can mean your property will sits vacant and more vacancy losses in the spreadsheet. Or you could undercut your potential rental income, leaving money on the table.
Whether you currently own rental real estate or aspire to invest in rental properties, you need to have knowledge on how to determine the fair market rent for a rental property and how valuation helps.
In the Philippines, there is a Rental Act that serve as guide in the rental transactions, however it covers only the P10,000 monthly rental property and below. Thus, the rental transaction between parties are important.
Based on the definition of the Philippine Valuation Standard, market rent is the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and a willing lessee on appropriate lessee terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.
In the nutshell, market rents are determined by the property’s size, type, and location. For example, a two-bedroom fair market rent in a Cebu City subdivision could be P60,000, while it could be P20,000 in a less expensive district area. Market rent differs from contract rent which is the stated amount in a contract between parties. Market rent always play higher than the contract rent, however it is not always be the case.
How is market rent determined? There are different factors such as property type, unit size, location of the property and the condition of the property. There are secondary data that can be used online to compare rental listings based on size and locations such as Carousel, Property24, Lamudi and other websites.
Using the lenses of a property manager, market rent determination can also be aligned with the goal of the property owner for profitability and be on top of the competition. Thus, the need for the regular valuation of the property is a must in decision making of the top management.
Fair Market rent can also be raised through renovation or total reconstruction of the property based on its highest and based use. Renovation of the building is the common method to achieve competitive and modern status. Determining the current status of different component of the building is the first step in conducting renovation and repair of a building. A rehabilitated and modernized structures is a passport to any proposal for price increases and profitability.
More so, renovation will bring additional value to the property. The life span will be extended and will result in a higher valuation due to introduction of additional improvements.
Appraisers should learn to master the numbers in providing assistance to the building owners, property managers and tenants. Anyway, numbers is the appraisers tool in reaching a credible and knowledgeable appraisal.