In the last four years, the price of rental housing has experienced an average national increase of 18% , according to the report Rental housing in Spain in 2017 , prepared by Fotocasa. However, the rental boom does not affect all apartments or houses equally , since the rental value will depend on the characteristics of each property. How can you set the rental price of a home? We give you the keys to establish a fair value, both for the landlord and for potential tenants.
Formulas for setting the rental price of a home
As a starting point, to set the rental price of a home you have different systems or formulas that will help you determine the initial value of the lease.
These are average indices that are periodically prepared by the Bank of Spain , based on data from the real estate sector and the labour market, and that will allow you to discover what the cost of rent should be so that it is in line with reality:
- Gross rental yield: consists of calculating the percentage that represents the annual rent in relation to the sale price of the property : Annual rent/Sale price x 100
- PER (Price Earnings Ratio): this involves establishing the number of times that the price of a rental property is included in the current sales value or the time that you will need to rent the apartment or house to pay off the purchase: Sales price/annual rental payment or Sales price/monthly rental payment.
According to the latest report on housing indicators , published in June 2018 by the Bank of Spain, the gross rental yield in 2017 was set at 4.2%, equivalent to a PER of 23.8 years or 285 months .
Thus, in order for the monthly fee to be in line with the characteristics of the property and its location, and therefore reasonable for the landlord and the tenant, it would be enough to apply these ratios to the particular case. Thus, for example, for a property with a sales value of 200,000 euros, the rental cost would be, a priori , around 8,400 euros per year or 700 euros per month.
Factors affecting the value of the lease
However, the figures published by the Bank of Spain are national averages, i.e. indicative, because the rental value can vary depending on each specific case . Thus, for example, if the apartment is very old or is in a run-down neighbourhood, it is possible that the most suitable rental price is lower than the PER value or the gross profitability.
Therefore, once the average rental fee has been calculated, it is important to adjust the monthly payments based on several parameters :
- The market. The first step to determine the price of a rental property is to find out the rental value of properties in the same area and with similar characteristics, to check if the initial calculations are in line with supply and demand. To do this, it is advisable to carry out a search on different real estate portals, such as Fotocasa or Idealista.
- Location. According to the Uniplaces.es portal, the location of the property determines 40% of the price of a rental property. Thus, apartments or houses in the centre of cities are more expensive than those in the outskirts, just as rents in new residential areas are also usually higher than those of apartments or houses located in decaying neighbourhoods.
- Services. Are there shops in the area? Are there schools for children nearby? Are there good public transport connections? The services offered in the area of the property will also affect what the tenant is willing to pay to live in the property.
- The property. The characteristics of the property also affect the rental price: size, number of rooms and bathrooms, floor number, orientation, layout, windows facing outside or inside, with or without a lift... A recently renovated flat is not the same as one in worse condition or a flat with a terrace with views is not the same as a ground floor flat with little light. In fact, according to Uniplaces.es, a renovated flat allows for a rent increase of around 10%, the same increase that can be applied to a penthouse compared to the rest of the flats in the block.
In addition to these factors, the higher or lower rental price will also depend on the need or the urgency you have to rent the property . In this sense, you should know that every month that it is empty, you are losing 8% of the year's income, according to the Ideas y Ahorro website. What do you prefer? Rent it for a lower amount or wait for a tenant who is really interested in the property? To resolve your doubts, it is always advisable to hire the services of a professional .