Making a judgement call about how much a rent payment should really cost is a tricky game to play. By simply comparing the prices of rent in a given area we can get a good starting inclination, but that doesn’t necessarily show us that the price is fair.
Landlords can drive up their rental prices based on their renovations, increased property values, furniture, and because of reduced demand in the area. That being said, only the only thing that a landlord actually needs to charge rent against is the property’s tangible value, while everything else is simply just ‘fluff’ pricing. By learning how to calculate a ballpark figure for a property’s tangible rental price, we can gain the upper hand in a haggling battle that is worth a few hundred dollars to us every year.
Finding a property’s true rental price begins by finding out the home’s purchasing price. This is usually best done by finding a property tax assessment online for a handful of properties in the area, and compare the government’s price point against what the properties are actually listed at and selling for. In establishing this premium, we gain access to a good approximation of what the fair price of the property is. From there, the value listed by the government functions as being the carrying value of the property for the landlord, meaning it shows us the effective cost of carrying the property.
From there, we want to use an online mortgage payment calculator to determine what the mortgage payment for borrowing against both the fair value and the carrying value of the property might be. Write that number down, and then find out what the full price of the mortgage would be if we added all of the condo fees and tax payments into the monthly mortgage payment amount of both the fair and carrying value mortgage payments. This final ‘mortgage price’ is the home’s effective price for the landlord, and represents the amount of a mortgage payment that needs to be made from a cost perspective. That being said, there’s also another way to find the value that could show us where it is the premium on the property is coming from.
The second way to calculate the true value of a property from the perspective of a landlord is to use a strategy called the ‘capitalization method’. It’s pretty easy, just take your annual rental costs, and divide them by the prevailing mortgage interest rate. This will be the value of the property to an unsophisticated landlord that is not writing off their interest payments. If you complete the same calculation with an interest rate that is reduced by about 20%, you’ll find the value of a property to a sophisticated landlord, and might very well notice that it is either very close to the actual price of the property that you find before, or that it is way too high.
If the value is above what you feel the property is actually worth, the landlord is enjoying a substantial premium on your rental payments, and you should maybe see if you can negotiate a break. Alternatively, if your capitalized value is particularly low, you should maybe find a shredder, to make sure that your landlord doesn’t find your math and use it against you.