RENT deconstructing the myth

RENT: deconstructing the myth.

Currently, in many parts of Europe and the world, a major issue concerns both realtors and real estate agencies as well as customers and clients. Cyprus does not constitute an exception in that aspect. Availability of rentals as well as their pricing and methods of calculation and determination seem to be on everyone’s mind these days. In this article, we will attempt to reconstruct rental prices and assist you in determining and understanding the ways and methods of calculation.

Rent: what factors play a major role

Firstly, rental prices are dependent and influenced by three major variables and this is one of the primordial reasons why they are never stable and why they are everchanging. More specifically, the rental price of a real estate is determined and depends on:

  • the purchase price of a property
  • the return on investment, also known as ROI
  • finally, on the law of supply and demand as is evident in the area where the property is located, the type of the property as well as on the socio-economic climate

In the next steps of the article, we will attempt to explain each factor individually and provide more information regarding how they contribute to rental prices.

Purchase prices: how can they affect rental prices

The purchase price of a real estate property can be determined after a thorough examination and research of other, similar properties that have been sold in the same area. Emphasis and attention need to be placed on properties that have already been sold. The reason behind this is that the market is dominated by listings and properties for sale with unreasonable prices, properties that most likely will never go out of the market. You can actually be assisted in finding the real numbers and purchase prices by your real estate agent or appraiser. Finally, it is worth noting that purchase prices are also affected by the timing when sales are effectuated.

Return on investment (ROI): how is it calculated?

This is a variable that is usually calculated using the following mathematical formula: ROI = Net Profit/Total Investment * 100. The yearly rental constitutes the net profit and the property purchase price (in real-time) is the total investment. For 2020, the normal ROI for properties in Cyprus will vary between 5% and 7%.

The inescapable law of supply and demand

This inextricable law applies to every area and market domain. When applied to the real estate market, this signifies that whenever there is a high supply of property rentals prices fall and vice versa.

Taking all the above variables into consideration, anyone can roughly determine what is a fair rental price. We will attempt to make this clearer through the following case study.

Case study: how are rental prices determined

Taking, for instance, the case of a new, one-bedroom apartment located in Nicosia, we can begin evaluating and estimating the rental price of this and similar properties. The apartment was purchased for 115.000 euros and its owner is asking for 550 euros per monthly rent. So, 550 * 12 = 6.600.

Taking the above formula into consideration, we can calculate the ROI factor as follows: 6.600/115.000*100 = 5.7%, a figure that we can say is rather normal and fair.

Generally speaking, when ROI factors are calculated and estimated below 5%, then this property’s rental price is low, something that can be caused by low demand for similar properties at that point in time. On the other hand, when ROI factors are estimated above 7%, then rent is considered as premium and/or demand and purchase prices are particularly high in these areas.

In conclusion, these are not the only factors that affect prices. There are other smaller ones, such as availability and existence of furniture, appliances and professional permits or accessibility when referring to properties destined for commercial use. In these cases, we suggest you seek professional advice so as to better calculate and estimate rental prices.

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23-May-2020