Renting a Home: Calculating the Ideal Rent

The values of houses for rent have shown an evolutionary trend in the last year. If, on the one hand, landlords want to make a market-adjusted value that guarantees them profit, tenants are looking for the cheapest possible offers.

The values of houses for rent have shown an upward trend in the last year, mainly due to high demand. However, when renting an apartment, the questions arise: 

  • Is it too expensive, too cheap? What is the ideal rent after all?

While on the one hand landlords want to make a market-rate offer that guarantees them a profit, on the other hand tenants are looking for the cheapest possible rent.
Factors that determine the value of a rentIn order to establish the right rent, one must first take into account the expenses that are inherent to it:

  • Property Tax;
  • Income tax;
  • Condominium fees;
  • Multi-risk insurance.

In addition to these expenses, it is recommended that the landlord has a savings account, both for possible maintenance expenses and to guarantee that no losses will occur. To these expenses will be added, if applicable, the monthly installment of the mortgage.
Maintenance, painting and repair expenses can be deducted from the IRS, as can lighting and central heating expenses. IMI and insurance charges are also deductible.
Home loans for rental housingAs the mortgage is the most relevant factor in the process of buying a house, since it is rare that the total amount is available for immediate payment, the client has to inform the bank about the purpose of the credit request.
In other words, if you know in advance that the house you intend to buy will be rented, the contract will contemplate this situation, both in terms of conditions and the spread proposed by the bank.
If, on the other hand, you decide to rent your house during the course of the credit, there is no problem. However, you are obliged to notify the bank of this intention. In these cases, the bank usually renegotiates the spread.
However, there are of course exceptions: If the decision is based on the fact that one of the members of the household is unemployed, or if the place of work moves to another location at least 50 km away from the house, the bank will not renegotiate the spread.
When deciding to change the purpose of the credit, if the conditions proposed by the financial institution are not to your liking, you can always transfer the credit to another financial institution that has a better offer. 
The same applies to the insurance taken out, and there is always the possibility of switching to an insurance company that offers cheaper rates and/or more attractive conditions. 
How to reach the ideal value of the rent: Practical ExampleAna and Carlos are a young couple that bought a two bedroom apartment in Lisbon for 140 thousand euros to rent out. To do so, they took out a mortgage with a monthly payment of 400 euros. 
To this installment, we add the IMI, the income tax, the insurance, the condominium, as well as the savings for two months of vacancy per year. All in all, the couple will have to charge at least about 740 Euros to avoid losses.
This value can be changed annually, however, one must pay attention to the guidelines on updating the rental values.
Here are the calculations:Type of charges on the property

  • IMI (140.000 euros x 0.3% / 12) – Monthly value: 35 euros / Subtotal: 35 euros
  • Multi-risk insurance (150€ / 12) – Monthly amount: 12.5€ / Subtotal: 47.5€
  • Life insurance (300 / 12) – Monthly amount: 25 / Subtotal: 72.5
  • Monthly mortgage payment – Monthly payment: 400 EUR / Subtotal: 472.5 EUR
  • Condominium fees – Monthly payment: EUR 10 / Subtotal: EUR 482.5
  • Increase in savings for two months of annual vacancy (EUR 482.5 x 2 = EUR 965) – Monthly amount: EUR 96.5 / Subtotal: EUR 579
  • Increase of income tax (28% x 579) – Monthly value: 162.12 / Subtotal: 741.12
  • Final rental value – EUR 741.12

It is essential to point out that if by chance the couple had already repaid the mortgage, the profit margin would be higher. Otherwise, the key is to compare the market and then choose the most advantageous credit offer.

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