Also known as cadastral income, the rental value or value of a rental property is often used in the assessment of the residence tax and the property tax. It is necessary to know how to estimate it, as this allows defining the exact amount of local taxes.
Mastering the calculation is not only reserved for professionals such as the tax officer or real estate advisor. Mr. and Mrs. Everyone can learn the technique. If this topic interests you, we suggest you read this article.
But to better understand the ideas, it is appropriate to first explain what is meant by rental value.
📋 Key points: Personally, I consider that gross profitability is just a facade; you have to aim for net return after charges. In my opinion, a good investment must show at least 5% profitability to absorb unforeseen events. Using the capitalization method remains the most concrete way to set a coherent purchase price.
What does rental value consist of?
Compared to other types of investments, investing in real estate is so interesting. However, many pieces of information should not be ignored to help you improve the return on your rental investment project.
The rental value corresponds to the amount of annual rent you can expect from your property. It will be established based on the nature of the house, its overall condition, as well as its location. This information is also very useful to the tax authorities, as it allows them to estimate the amount of your income tax.
Tax deductions remain possible when calculating the value of a rental property. This is the case, for example, when the owner carries out maintenance work.
It should be noted that the rental value applies to any type of real estate property. Whether it is a premises for professional use or residential use, it serves as a reference to set your local taxes.
🗣️ My experience: In 2022, I almost bought a studio for 120,000 euros that seemed perfect. By calculating the actual condominium fees, I realized that the net return dropped from 6% to 2.8% in an instant. The lesson is clear: never sign anything without having scrutinized the last three general assembly minutes.
How to estimate the rental value of a property?
(function(){if(window._alpLd)return;window._alpLd=1;var s=document.createElement(‘script’);s.src=’https://cdn.jsdelivr.net/npm/alpinejs@3/dist/cdn.min.js’;s.defer=true;document.head.appendChild(s);})()The calculation is generally carried out by the tax authorities. To do so, they take into account many parameters, namely the living area, the age of the building, as well as the location.
| Estimation Criteria | Description and Role in the Calculation |
|---|---|
| Weighted Area | Considers the usable area, adjusted according to the nature of the rooms (main, secondary). |
| Property Category | Classifies the housing according to its characteristics (modest, standard, luxurious). |
| Location and Environment | Includes the geographic area, neighborhood attractiveness, proximity to services. |
| Reference Rates | Scales set by the administration or comparable on the local market. |
| Correction Coefficients | Adjust the value according to the condition of the property, equipment, renovations. |
| Comparison with Similar Properties | Allows refining the estimate by analyzing rents charged for equivalent properties. |
| Fiscal and Rental Objectives | Used to calculate property tax, housing tax, or to set a fair rent. |
👍 Strengths
- Stable passive income
- Bank leverage effect
- Protection against inflation
⚡ Weaknesses
- Time-consuming management
- Risk of unpaid rent
Once the person in charge has obtained this data, it will then be compared with properties of similar categories.
It should be noted that the calculation bases can vary from one region to another. The estimate generally evolves over time. It depends on the state of the market and the level of taxes on your income.
It must be admitted that the calculation is not an easy task at all. It is better to get help from professionals such as real estate agents. With their knowledge in the field, they can provide you with a reliable and accurate rental value.
Moreover, it is possible to use simulators that perform an online estimate. They ask you for some information and with this data, they automatically calculate the value of a rental property.
🌍 Did you know?
In France, the average rental vacancy rate is about 7%. It is therefore prudent to deduct one month of rent per year in your projected profitability calculations.
How to know if my rental property has increased in value?
- Avoid mistakes: To avoid bad decisions, it is necessary to know the profitability of your rental property.
- Performance indicators: There are several indicators allowing you to obtain reliable results. For example, net yield after charges, net-net yield, and gross yield are distinguished.
- Simplified calculation: As for the last one, it seems the easiest and fastest to calculate. You just need to divide the annual rents by the purchase price of the property and then multiply the result by 100.
- Profitability range: In most cases, the profitability of rental real estate varies between 2 to 7%. The gain usually depends on the type of property.
- Comparison of areas: According to experts, a small-sized dwelling can yield more than a large house. But with the first category, tenants change very often. On the other hand, a medium-sized home hosts stable tenants, as it is usually families.
⚠️ Common misconception
Thinking that a high rent guarantees good value. This is false: if the charges are excessive, the resale value of the property will be heavily impacted.
How to calculate the selling price of a rental property?
| Indicator | Simplified formula | Target objective |
|---|---|---|
| Gross Yield | (Annual rent / Purchase price) x 100 | 6% to 10% |
| Net Yield | (Rents – Charges) / Total price | 4% to 6% |
| Cash-flow | Rents – (Loan + Charges + Taxes) | Positive (> 0€) |
| Rent multiplier | Selling price / Annual rent | 15 to 20 years |
Regardless of their reasons, many owners plan to put their rental properties on the market at the time being discussed.
If tenants occupy the house, a discount will be applied. This varies depending on the lease duration. When the contract term is still far off, the discount can increase.
For example, the price reduction will be 5 to 10% for a property occupied with a lease ending in one year. Conversely, a house sold with a lease contract signed recently will be offered with a discount of more than 15 or even 20%. Besides the lease duration, the discount also depends on the type of property, the rent amount, and the tenant’s age.
💡 Practical advice
Use the 1% rule: a property is generally considered an excellent deal if the monthly rent is close to 1% of the total purchase price.
What is the difference between gross and net yield?
Gross yield only takes into account the purchase price and rents. Net yield deducts property taxes, management fees, and unrecoverable charges for a more honest view.
How to estimate the green value of a rental property?
The green value corresponds to the added value linked to energy performance (DPE). A property rated A or B can sell for up to 15% more than a property rated F or G.
Should notary fees be included in the calculation?
Yes, to obtain a real yield, you must imperatively include notary fees and any potential renovation costs in the total acquisition cost.
