Will the Rent Actually Cover the Instalment? The Check a Lender Also Runs

An illustrative calculation taking a headline rent down to what is left after voids, costs and tax, and comparing it against the instalment it is supposed to carry.

The claim that a rent covers an instalment is usually made with a gross annual rent and a monthly payment, which is not a comparison. The honest version takes the rent down through vacancy, collection, management, maintenance, insurance and tax, and then compares what survives against the instalment plus the reserve the property needs. The figures below are illustrative and show the method. The published headline VAT rate of 15% applies to commercial rent and should be confirmed with ZATCA for your specific case.

The situation

An investor is considering a residential apartment at SAR 1,100,000, financed with SAR 300,000 of equity and SAR 800,000 of finance, with an instalment of SAR 6,200 a month for this illustration. The agent quotes an achievable annual rent of SAR 75,000. The investor wants to know whether the rent carries the instalment and what is left over.

Assumptions (illustrative)

• Purchase price: SAR 1,100,000, with SAR 300,000 of equity and SAR 800,000 financed.
• Instalment on the finance: SAR 6,200 a month, or SAR 74,400 a year.
• Quoted achievable annual rent: SAR 75,000.
• Assumed vacancy and collection loss: 8% of gross rent.
• Assumed management and letting costs: 6% of collected rent.
• Assumed maintenance reserve, service charges and property cover: SAR 11,000 a year combined.

Step 1: Compare the headline figures

Gross rent of SAR 75,000 against annual instalments of SAR 74,400 leaves SAR 600 a year.

This is the comparison that gets quoted, and it already shows almost nothing to spare before a single cost is deducted. Any further deduction puts the property into monthly deficit.

Step 2: Deduct vacancy and collection loss

SAR 75,000 less 8%, which is SAR 6,000, gives collected rent of SAR 69,000.

A unit is not let every day of every year, and not every tenant pays on time. Eight per cent is roughly one month of the year, which is a modest rather than a pessimistic assumption.

Step 3: Deduct management and letting costs

SAR 69,000 less 6%, which is SAR 4,140, gives SAR 64,860.

Somebody has to find tenants, handle the lease and respond to problems. If the investor does it personally the cash cost disappears, but the time cost does not, and a distant owner cannot do it at all.

Step 4: Deduct maintenance, service charges and cover

SAR 64,860 less SAR 11,000 gives net operating income of SAR 53,860.

This is the figure the property actually produces before finance. It is SAR 21,140 below the gross rent the agent quoted, which is the entire margin of the investment in this case.

Step 5: Set net income against the instalment

SAR 53,860 of net income less SAR 74,400 of annual instalments leaves a deficit of SAR 20,540 a year, or about SAR 1,710 a month.

The rent does not cover the instalment. The investor must fund roughly SAR 1,710 every month from other income, in addition to the SAR 300,000 already committed.

Step 6: Find the rent at which it breaks even

Working backwards, the gross rent needed to produce SAR 74,400 of net income after the same deductions is approximately SAR 104,000 a year, which is around 38% above the quoted figure.

The gap is not marginal. Either the rent assumption is far too low, the equity contribution is too small, or this property does not work as a financed rental at this price.

What changes the answer

• The equity contribution, since a larger one reduces the instalment and can close the deficit entirely.
• Whether the letting is residential or commercial, because commercial rent carries VAT at the published headline rate of 15%.
• The vacancy assumption, which is the single most powerful input and the one most often set to zero.
• Service charges in a managed building, which are fixed whether the unit is let or empty.
• Whether your pricing can reset, because a rise in the instalment widens the deficit immediately.

What the numbers tell you

• Compare net operating income against the instalment, never gross rent against the payment.
• A vacancy assumption of zero is the most common error in a rental case and the easiest to correct.
• Work out the break-even rent, because it tells you immediately whether the deal is close or not close at all.
• A monthly deficit is not fatal if you intend to fund it, but it must be a decision rather than a discovery.
• A lender runs a version of this calculation too, which is why projected rent rarely helps an application.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works alongside the finance side of a property purchase or a build: the valuation evidence, the cost plan and the construction programme that a lender needs to see. The lending terms come from your bank or finance company, and Domira makes sure the property side of the file stands up.