Buniyad Blog

How is Rent for Residential Property being ascertained in India? What are the fundamental components of rent?

By Buniyad

05/25/2015

Are you an occupant/tenant hoping to possess a good residential property? Or are you a landlord hoping to earn income from your private property? For both the cases, rent is the primary discussion prior getting indulged into a lease agreement. Now the concern comes as to how much rent should be paid for a given residential property? What are the crucial components of rent? How much is the security deposit? How much would the other monthly charges amount to? How is the security amount paid back when the tenant has moved out of the property?

What amount of rent should be paid for a given property?

Rent is the monthly payment being made by the tenant to the landowner for using their property either for living purpose or for the purpose expounded in the lease agreement. It is undeniable that any deviation in the usage of the property by the tenant would certainly lead to expulsion. The question now arises on the agreeable amount of rent that tenant and property owner can arrive at?

Predominantly there are two methods:-

Rent comparison method

The most familiar yardstick being used by both owner and tenant for ascertaining the rent of the residential property. This phenomenon is based on the ability of comparable properties to create monthly rent.

For ex : In a given locality one needs to bear in mind the amount for monthly rent that others are paying. In the event that properties being referred to are highly similar then, one would expect the same rent for a specified property. Nonetheless, if the properties are unalike, then the rent is adjusted. If the subject property is better than other properties in the locality, then, chargeable monthly rent will be on higher side and vice versa.

Cost method

It is a method based on the cost of the property which is the summation of the current market value of land + cost of construction. It is no-brainer that the rental produced for residential properties in India is not very high. Normally a property fetches between 2-3% of annual return on cost of the property.

For ex : If the cost of property amounts to Rs.1 Crore then the anticipated yearly rent could fall in the range of Rs.2-3 L or Rs.16000-25000/month. Make sure that, this 2-3% annual rent is computed when the property being referred to is fully developed or its FSI (Floor Space Index) is fully utilized.

What are the main components of Rent?

Monthly rent for a residential property consists of following elements:

Base rent which is computed either by ‘rent comparison method’ or ‘cost method’.
Utility charges (comprising of electricity bill, water bill, Gas charges etc.) are to be paid by the tenant as per actual.
Maintenance charges are additional charges that are being paid by the tenant.
Security deposit is the lump sum amount demanded by the landowner at the inception of the lease agreement. It considerably is an interest-free payment and is paid back by the landlord to the occupant when the property is vacated. However, if the property has been damaged or defaced during the tenure of tenant, in that case the property owner may hold some portion of security deposit to cover the expenses. And this is evidently mentioned in the agreement as well. It goes without saying that the security deposits differ from city to city. As a matter of interest, in Delhi the security deposit is about 2-3 months of rent amount whereas in Bangalore, the security deposit demanded by landlord is around 10 months of rent.

Thusly it is all-important for both landlord and tenant to have a profound discussion regarding the same well in advance alongside all the charges shall be clearly highlighted in the lease agreement to dodge any challenges throughout their tenure.

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