Understanding the fair rental value of a property is important for running a successful and sustainable rental business. It can make the difference between having vacant properties and finding the right tenants.

In India, where the real estate market is as varied as its geography, calculating fair rental value allows you to stay competitive. From bustling metros to smaller towns, rental prices can shift dramatically. But with the right approach, you can find that sweet spot—charging a fair rate that attracts the right tenants and keeps your property occupied.

So, read on to understand what fair rental value means and how to calculate it.

What is Fair Rental Value?

Fair rental value refers to the price that a property could reasonably be expected to rent for in the current market. It considers various factors such as location, local real estate market conditions, amenities, and the overall condition of the property. 

Essentially, fair rental value reflects what tenants are willing to pay and what landlords can expect to receive based on market conditions.

In India, determining fair rental value involves analysing comparable properties in the same area, known as "comps." This process ensures that the rental price is competitive yet fair, benefiting both parties. 

Overall, understanding fair rental value is the first step toward making smart rental decisions.

Next, let's explore the key factors that influence the fair rental value of a property.

What are the Key Factors That Determine Fair Rental Value?

Here are some of the primary factors that determine fair rental value:

• Location: Location is perhaps the most significant influence on rental value. Properties in prime areas with access to amenities, schools, and public transport generally command higher rents. Safety and neighbourhood reputation also play an important role.

• Size and Layout: The size of the property, including both built-up and carpet area, along with the number of rooms and their layout, directly influences what tenants are willing to pay. 

• Overall Condition: A property in good condition—freshly painted, with modern fixtures, and well-maintained—will always attract higher rent. Keeping your property in top shape ensures that you can command a fair rental value.

• Market Trends: Current supply and demand dynamics affect fair rental value. High demand with limited supply allows for higher rents, while an oversaturated market may require price adjustments. For example, in Bengaluru, where the IT sector drives high demand, rental rates tend to be higher. 

• Amenities: Additional features like parking, gardens, swimming pools, gyms, and security can boost rental values. These amenities add value and justify a higher rent.

• Neighbourhood Development: Areas undergoing rapid development or urbanisation tend to have upward shifts in rental values. New infrastructure projects, metro stations, or business hubs nearby can significantly raise a property's rental potential.

By taking these factors into account, you can better understand your property's fair rental value and set a competitive rental price.

With these factors in mind, let's move on to how to calculate your property's fair rental value.

How To Calculate The Fair Rental Value Of A Home?

There’s no single formula for figuring out the fair rental value of a home. So, here are three simple ways you can use to help you find the right amount:

1. Assessing Rental Yield to Determine Fair Rental Value

Rental yield is the annual rental income divided by the property’s value, expressed as a percentage. This figure helps you understand the rental profit you could earn and the return on investment (ROI) for your property.

To calculate it, divide the annual rental income by the property’s purchase price, then multiply by 100. For example, if your property generates an annual rental income of ₹60,000 and its purchase price is ₹15,00,000, the rental yield would be:

Aim for a rental yield between 3% and 4% of your property's market value to ensure reasonable profits.

To accurately determine the fair rental value, you should align the rental rate with your area's demand and supply dynamics. If there's high demand for rental homes but limited supply, setting the rental rate at around 4% can be appropriate, but it’s crucial not to exceed this percentage. 

Conversely, if demand is low, it’s wise to adjust the rate to about 3% to attract tenants. 

2. Comparing Local Rental Rates for Fair Rent Calculation

Another effective way to determine the fair rental value of your home is by comparing rental rates in your area. Here’s how to go about it:

• Identify Comparable Properties: Look for properties similar to yours in terms of size, number of bedrooms, and amenities. For example, if you own a 2BHK apartment, search for other 2BHKs in your neighbourhood. This targeted approach will help you narrow down the fair rental value.

• Evaluate Furniture Value: If your property is furnished, calculate how that affects rental value. You can either increase the rent slightly to reflect the value of the furniture or check with furniture rental firms to see how they price similar items.

• Check Online Listings: Use online real estate platforms like 99acres, Magicbricks, or Housing.com to gather current rental listings. Note the rental rates for comparable homes in your area.

• Visit Local Real Estate Agencies: Reach out to real estate agents in your locality for their insights on current rental prices. They often have a good understanding of the local market and can provide valuable data.

• Consider Time on Market: Pay attention to how long similar properties stay on the market. If they are renting quickly, it might indicate that the prices are set correctly. Conversely, if properties linger for extended periods, it may suggest that the rates are too high.

• Check Rental Price Trends: Track rental price trends in your area over the years. You can find this information on home listing websites. These trends will help you see how rental prices have changed and can give you an idea of how much your home’s fair rental value might increase in the future. 

Additionally, consider the location's infrastructure, connectivity, and nearby amenities before calculating the rental value.

3. Calculating Rent Per Square Foot of Carpet Area

Another method to calculate the fair rental value is to base it on the carpet area of your property in your locality. Here’s how to do it:

1. Start by measuring the carpet area of your home, which includes the actual usable space within the walls, excluding balconies, walls, and common areas.

2. Look for rental listings in your area that specify prices per square foot.

3. Once you have rental prices for comparable properties, calculate the average rent per square foot. 

4. Multiply the average rent per square foot by your carpet area to determine the fair rental value.

For example, let’s say you want to rent out your furnished 2BHK, which has a carpet area of 800 sq. ft. You check the market and find a similar 2BHK with a carpet area of 750 sq. ft. that is renting for INR 35,000 in your locality.

To find the rent per square foot for that property, you can set up a simple calculation:

So, the fair rental value for your 800 sq. ft. property would be around ₹37,336.

Now, let’s understand how to calculate the property value based on rental income. This will help you assess whether your investment is generating good returns.

How to Calculate Property Value Based on Rental Income?

If you're planning to buy a property but are unsure about how much it should cost, this section will help you find a reliable estimate. 

As previously mentioned, for residential properties, a good rental yield typically falls between 3% and 4%. Now, based on this, here’s how you can  determine a reasonable property value:

1. Start by finding the average monthly rent in your desired locality. For instance, if the monthly rent is ₹45,000, the annual rental income would be: ₹45,000 × 12 = ₹5,40,000

2. Then, use this formula to find the property value for both 3% and 4% rental yields- Property Value = Annual Rent ÷ Rent Yield.

This means the property could cost you around ₹1.35 Crore to ₹1.80 Crore. For a more accurate figure, you can check the rental yields specific to your area/locality.

Here’s a table showing the rental yields for some of the major cities in India:

*Rental yields are averages and may vary by location and property type. Always check for accurate data based on locality.

Now, let’s explore how fair rental value is treated under income tax rules and what is it’s role in determining taxable income.

What is Fair Rental Value in Income Tax?

If you own a property, the income you earn from renting it out is subject to tax. The fair rental value helps calculate this income. The taxable income from house property is calculated based on the higher of:

1. Actual rent received (or receivable), or

2. The fair rental value of the property.

Let-out Property (Rented)

If your property is rented out, the Annual Value for tax purposes will be the higher of the actual rent received or the fair rental value. This ensures that even if a property is rented out for a lower-than-market price, tax is calculated based on a reasonable market estimate.

Deemed Let Out Property

If you have more than two properties, only two can be treated as self-occupied. The others will be considered "deemed to be let out," meaning they will be taxed as if they were rented out, regardless of whether they actually are.

For these properties, the fair rental value is used to calculate the annual value. This means even if you're not earning any rent from them, you will still be taxed based on what the property could reasonably earn in the rental market.

Understanding the fair rental value is essential for accurately reporting income and planning for tax liabilities. Always keep track of the current rental market to ensure you're calculating your potential tax obligations correctly.

Conclusion

Understanding the fair rental value of your property helps you attract the right tenants and ensures you set a competitive rental price. By using different methods to calculate this value, you can make informed decisions that benefit your rental business.

Additionally, knowing how fair rental value impacts your tax obligations will help you manage your finances effectively. 

Remember, always stay updated with current market trends to ensure you’re setting the right rental price. If you need help, don’t hesitate to seek advice from professionals who can help you accurately value your property.