Rental value

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Rental value is the fair market value of property while rented out in a lease. More generally, it may be the consideration paid under the lease for the right to occupy, or the royalties or return received by a lessor (landlord) under a license to real property. [1] In the science and art of appraisal, it is the amount that would be paid for rental of similar real property in the same condition and in the same area. [2] [3]

Contents

Determining Rental Rates [4]

Deciding on a rental rate doesn’t just mean figuring out the highest possible price you could list your rental for. Increasing the rental rate to the top of the market, can also increase the number of calls or issues a tenant may complain about during the term of the lease.

e.g. If you’re paying top dollar for something, you expect an exceptional experience. If you pay a below market rent, you are likely to not complain about smaller issues since you’re paying less.

Pricing your rental should be a strategy in order to maximize your net income. The longer you own the property, the easier this becomes.[ citation needed ]

Other Definitions

In economic terms, the rental value is the added value an individual contributes when goods are being exchanged or traded for profit. This additional quality is often fixed and is alone under the trader’s ownership. The characteristic can be tangible such as a signature method of use or intangible such as exclusive knowledge pertaining to a product; also known as intellectual property. The value arises from when the market or model is in equilibrium and it is advantages for an individual to take part in trading activities rather than not participate, considering profit or utility can be achieved. [5] Two separate but ideally identical exchange scenarios may occur but may have completely different values calculated. [6] This is explained by two classic examples, a consumer achieves a surplus or profit when buying goods if they are able to buy all quantities at a single price. The producer lacks knowledge concerning the relationship between an individual’s willingness-to-pay and quantity. This means the producer cannot price discriminate according to the consumer’s demand marginality. In this example the buyer has achieved a beneficial rent. If the seller were to discover the buyers willingness-to-pay at different quantities, the seller could maximize their profit by selling quantities at different prices. In most situations this is achieved by slightly lowering the price as more products are bought. In this example the seller achieves a beneficial rent. [5] Economic theories suggest that a free market would correct itself of rents. Considering the producer surplus example, if the gradual discounting of prices also attracted more consumers, the producer would have to re-evaluate their strategy. Often, consumers have different willingness’-to-pay for goods. Following this assumption, profit would not be maximized because the price strategy would not be applicable to all buyers. However, if analyzed in reality, through means such as market research, the producer can find a willingness-to-pay that represents most buyers. Consumer rent from the individuals who still pay for goods lower than willing and the producer rent from ability to price discriminate would then counter one another, resulting in market equilibrium. [6]

In a contract lawsuit, the lessor could collect the rental value of the premises from the saloon lessee (tenant) who had violated a lease. [7] Usable value is not the same as rental value, but is equivalent, and has been used in a condemnation proceeding. [8]

Rental value can also be used in a divorce, separation, or annulment action for equitable distribution, in those states lacking Community property laws. [ citation needed ]

Fair market rent in the US

Fair Market Rent in the US context is the amount of money that a given property would command, if it were open for leasing at the moment.

Fair market rent is an important concept both in the Housing and Urban Development's ability to determine how much of the rent is covered by the government for those tenants who are part of Section 8, as well as by other governmental institutions. [9]

Fair market rent is sometimes used by appraisal districts to determine tax rates. [10]

U.S. HUD's Office of Policy Development and Research (PD&R) publishes Fair Market Rents and Income Limits (respectively, the basis for how much program administrators will subsidize housing units, and the maximum incomes that tenants may not exceed in order to qualify for subsidized housing) on an annual basis. These figures vary throughout the country based on a number of determining factors, such as local economic conditions and housing demand.[ citation needed ]

See also

Related Research Articles

Microeconomics Behavior of individuals and firms

Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as whole, which is studied in macroeconomics.

A monopoly, as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a specific person or enterprise is the only supplier of a particular thing. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly and duopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with a decrease in social surplus. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

Deadweight loss Measure of lost economic efficiency

Deadweight loss, also known as excess burden, is a measure of lost economic efficiency when the socially optimal quantity of a good or a service is not produced. Non-optimal production can be caused by highly concentrated wealth and income, monopoly pricing in the case of artificial scarcity, a positive or negative externality, a tax or subsidy, or a binding price ceiling or price floor such as a minimum wage.

Economic surplus Concept in economics

In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus, refers to two related quantities:

Price discrimination Microeconomic pricing strategy

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a firm must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc. All prices under price discrimination are higher than the equilibrium price in a perfectly-competitive market. However, some prices under price discrimination may be lower than the price charged by a single-price monopolist.

Price Amount of money given in order to purchase a thing or service

A price is the quantity of payment or compensation given by one party to another in return for goods or services. In some situation, the price of production has a different name. If the product is a "good" in the commercial exchange, the payment for this product will likely be called its "price". However, if the product is "service", there will be other possible names for this product's name. For example, the graph on the bottom will show some situations A good's price is influenced by production costs, supply of the desired item, and demand for the product. A price may be determined by a monopolist or may be imposed on the firm by market conditions.

In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the values of economic variables will not change. For example, in the standard text perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.

Renting Agreement where a payment is made for the temporary use of a good, service or property owned by another

Renting, also known as hiring or letting, is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership. An example of renting is equipment rental. Renting can be an example of the sharing economy.

Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

An ad valorem tax is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event. In some countries, a stamp duty is imposed as an ad valorem tax.

Operating surplus is an accounting concept used in national accounts statistics and in corporate and government accounts. It is the balancing item of the Generation of Income Account in the UNSNA. It may be used in macro-economics as a proxy for total pre-tax profit income, although entrepreneurial income may provide a better measure of business profits. According to the 2008 SNA, it is the measure of the surplus accruing from production before deducting property income, e.g., land rent and interest.

Pricing strategies Approach to selling a product or service

A business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.

Rent-to-own Type of transaction

Rent-to-own, also known as rental purchase or rent-to-buy, is a type of legally documented transaction under which tangible property, such as furniture, consumer electronics, motor vehicles, home appliances, real property, and engagement rings, is leased in exchange for a weekly or monthly payment, with the option to purchase at some point during the agreement.

Accounting for leases in the United States

Accounting for leases in the United States is regulated by the Financial Accounting Standards Board (FASB) by the Financial Accounting Standards Number 13, now known as Accounting Standards Codification Topic 840. These standards were effective as of January 1, 1977. The FASB completed in February 2016 a revision of the lease accounting standard, referred to as ASC 842.

A lease option is a type of contract used in both residential and commercial real estate. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property.

A slumlord is a slang term for a landlord, generally an absentee landlord with more than one property, who attempts to maximize profit by minimizing spending on property maintenance, often in deteriorating neighborhoods, and to tenants that they can intimidate. Severe housing shortages allow slumlords to charge higher rents, and when they can get away with it, to break rental laws.

Competition (economics) Rivalry between firms; ability of companies to take each others market share in a given market

In economics, competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought, competition causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater the selection of a good is in the market, prices are typically lower for the products, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly). According to Antoine Augustin Cournot, the definition of competition is the situation in which price does not vary with quantity, or in which the demand curve facing the firm is horizontal. The level of competition that exists within the market is dependent on a variety of factors both on the firm/ seller side; the number of firms, barriers to entry, information, and availability/ accessibility of resources. The number of buyers within the market also factors into competition with each buyer having a willingness to pay, influencing overall demand for the product in the market.

Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for fixed assets, notably real estate, as well as for durable and capital goods such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby the Falklands Islands would be transferred to Argentina, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the handover of Hong Kong to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.

Profit (economics) Difference between the revenue a commercial entity has received from its outputs and the opportunity costs of its inputs

An economic profit is the difference between the revenue a commercial entity has received from its outputs and the opportunity costs of its inputs. It equals to total revenue minus total cost, including both explicit and implicit costs.

This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.

References

  1. ↑ Ballentine's Law Dictionary, p. 450.
  2. ↑ Free legal dictionary
  3. ↑ Law dictionary online
  4. ↑ "Rental Rates and Rental Investment Values". Rent Ruby. 2017-07-29. Retrieved 2017-07-29.
  5. 1 2 Vleugels, Jan. "(Economic) Rent" . Retrieved 9 November 2011.
  6. 1 2 Lister, John. "What is Economic Rent?". Conjecture Corporation. Retrieved 11 November 2011.
  7. ↑ Geolet v. National Insur, Co., 164 N.E. 101, 62 A.L.R. 425, Landlord & Tenant (key #) 184(1)(year?).
  8. ↑ Reisert c. City of New York, 66 N.E. 731, 174 N.Y. 196 (year?).
  9. ↑ HUD USER – Datasets: Fair Market Rents
  10. ↑ 1996.08.05 DAB1594 Putnam-Clay-Flagler Economic Opportunity Council, Inc


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