Rental income
Rental income is what an owner is paid for letting out a property or part of it. This can be anything from letting a single bedsit or flat to commercial rent for office, retail or warehouse premises. For a property investor, the rental income is the ongoing income side of the property, and together with the costs it determines the property's cash flow and therefore its value.
It is common to distinguish between gross and net rental income. The gross rent is the full amount the tenant pays. If you deduct the owner's costs, that is operation, maintenance, property tax, insurance and administration, you are left with the net rental income. In commercial rent, the split of costs is set out in the lease: under a "barehouse" or "triple net" lease the tenant covers most of the costs, so that net is close to gross, while under other leases the owner carries more. Which costs are included, and how shared costs are allocated, is therefore central when you compare rental income between properties.
What rent you can achieve depends on the market rent, location, standard and contract terms. Long contracts with solid tenants give predictable rental income and lower risk, while short leases, high vacancy or weak tenants make the income uncertain. The rent is normally adjusted annually, often in line with the consumer price index, see CPI adjustment, so that it follows general price growth. If the tenant lets the premises on to others, this is called subletting, and the right to do so is set out in the lease.
Rental income is taxable income, but the rules vary. Letting out your own home can be wholly or partly tax free when the owner lives there, while letting out a pure rental home or commercial property is as a rule taxed as capital or business income. Skatteetaten (the Norwegian Tax Administration) distinguishes between letting that counts as passive capital management and letting that is so extensive that it counts as business activity, which affects both the tax rate and the right to deductions. For professional players, it is the net rental income after tax that ultimately determines the return. An owning company may also have deductions and depreciation that affect how much of the rental income is actually taxed.
One useful approach is to look at the rental income in the context of the whole income structure of a building. A commercial building with several tenants has a composite rental income where different contracts expire at different times, and the overall risk depends on how evenly the expiry dates are spread. If several large contracts end at the same time, a large share of the rental income can disappear in a short time. Spreading tenants, industries and contract lengths is therefore just as important for the stability of the rental income as the level itself.
In Placepoint you can examine the basis for rental income in an area: which properties exist, ownership and earlier transactions, so that you can assess realistic rent levels against the property's costs and an expected cash flow.
From Placepoint's dictionary: Rental income
More information: Skatteetaten: letting of homes and property
English: Rental income (leieinntekter; the income an owner receives from letting out property).
Frequently asked questions
What is rental income?
Rental income is what an owner is paid for letting out a property or part of it, from a single home to commercial premises. It makes up the ongoing income side of the property.
What is the difference between gross and net rental income?
Gross is the full amount the tenant pays. Net is what is left after the owner's costs, such as operation, maintenance, property tax, insurance and administration.
How does rental income relate to property value?
The rental income minus the costs gives the cash flow, which is the basis for valuing a rental property. High and predictable rental income gives a higher value.
Do I have to pay tax on rental income?
As a rule yes, but the rules vary. Letting out your own home can be wholly or partly tax free, while letting out a pure rental home or commercial property is taxed. See Skatteetaten.
How is the rent adjusted over time?
The rent is normally adjusted annually, most often in line with the consumer price index, see CPI adjustment, so that it follows general price growth.