What is the difference between a regular property valuation and a valuation of a rented property (in the Netherlands)?

We regularly receive requests from clients asking us to value their property. A valuation may be required for a mortgage, renovation, inheritance, divorce or many other reasons.

But sometimes, during the initial conversation, an important detail comes up:

“Oh, by the way, the property is currently rented out.”

And that changes things considerably.

A property that is rented out and will remain rented cannot simply be valued in the same way as a property that is vacant or occupied by its owner.

In this article, I’ll explain in simple terms why.

How do we determine the value of a regular owner-occupied property?

Let’s start with a property that is either occupied by its owner or vacant.

In very simple terms, a valuer works according to the principle of comparing apples with apples.

Suppose we need to value a well-finished terraced house with:

approximately 100 m² of living space;
a plot of approximately 150 m²;
a good state of maintenance;
a good standard of finish;
a particular location within a residential neighbourhood.

We then look for recently sold properties that are as similar as possible.

Ideally, these will be other terraced houses in the same area with approximately the same living area and plot size, a comparable standard of finish and maintenance, and a similar location.

We also look at extensions, outbuildings and other features. Does the property have an extension? A garage? A private parking space? And how do these features compare with those of the properties we are using as references?

We then analyse the actual transaction prices of these comparable properties and make adjustments for the differences between them.

This is known as the comparative method.

Of course, this is a highly simplified explanation. In a professional valuation, many other factors can play a role, such as leasehold (erfpacht), legal rights and obligations, public-law restrictions and other property-specific circumstances.

But for the purpose of this article, we’ll keep it simple: wherever possible, we compare apples with apples.

What makes a rented property so different?

Before you can understand how a rented property is valued, you first need to understand something about Dutch tenancy law.

Once you rent out a property in the Netherlands, the tenant may have substantial tenancy protection (huurbescherming).

In other words, you generally cannot simply say:

“I want to sell my property, so the tenant has to leave.”

There are exceptions and specific forms of temporary letting. Depending on the circumstances, this could include certain rental agreements involving a diplomatic clause or temporary contracts for specific groups permitted under Dutch law.

But the important principle for this article is this:

A tenant with tenancy protection can have a major impact on the value of a property.

And there is another important factor: the Dutch Housing Valuation System, known as the woningwaarderingsstelsel or WWS.

For properties subject to rent regulation, this points-based system determines the maximum rent that may legally be charged.

Points are awarded based on factors such as the size of the property, its WOZ value, energy performance and various facilities and quality characteristics.

The total number of points determines the maximum permitted rent.

So, in many cases, you cannot simply charge whatever amount a tenant is willing to pay.

Above the applicable liberalisation threshold, different rules apply. At the time of writing this article, 187 points is an important threshold within the Dutch rental system.

Please note that Dutch rental legislation, thresholds and maximum rents can change. You should therefore always check which rules apply at the time a property is rented out or valued.

And this is where things can become complicated.

Imagine that you believe your property has enough points to justify a rent of €2,000 per month.

The tenant subsequently has the rent assessed and it turns out that your calculation was incorrect and that the property actually falls within the regulated rental sector.

That can have serious financial consequences.

Depending on the circumstances and the timing of the tenant’s application, the rent may be reduced and the landlord may also have to repay rent that was charged in excess of the legally permitted amount.

For a property valuer, this is extremely important information.

How does a mortgage lender look at the value?

A bank or mortgage lender does not only want to know what a property might be worth under ideal circumstances.

The lender needs to know:

What is our collateral actually worth, and what risks are attached to it?

Let’s use a simplified example.

Imagine you purchased a property for €500,000. Let’s also assume that, vacant and free from tenancy and occupancy rights, its actual market value is €500,000.

You then rent the property to two tenants, let’s call them Peter and Mary, for €2,000 per month.

Everything goes well.

Until Peter and Mary decide to have their initial rent assessed.

In our fictitious example, it turns out that the property has far fewer WWS points than expected and that the landlord should not have been charging €2,000 per month. Suppose the permitted rent turns out to be only €800 per month.

The rent is adjusted.

Peter and Mary may then quite understandably think:

“€800 per month? We’re staying right here.”

And suddenly, you have a completely different property from an investment perspective.

What is a property with a vacant-possession value of €500,000 worth if you now want to sell it with sitting tenants who enjoy tenancy protection and pay only €800 per month?

This illustrates why the value of a rented property can differ significantly from the value of exactly the same property when sold vacant and free from tenancy rights.

How renting can affect the value of a property

When valuing a rented property, the valuer therefore also has to consider the income an investor can generate from the property and the return an investor would require on their investment.

Let’s return to our fictitious example.

With a monthly rent of €800, the annual gross rental income is:

12 × €800 = €9,600 per year.

Purely for illustration, suppose an investor required a gross initial yield of 5%. A very basic calculation would then be:

€9,600 ÷ 5% = €192,000.

This emphatically does not mean that the property in our example is automatically worth €192,000.

A proper valuation of a rented property is much more complicated.

The valuer may need to consider, among other things, the legal position of the tenants, contractual rent, maximum permitted rent, market rent, operating expenses, risks, required returns, future cash flows and other property- and market-specific factors.

But this simplified calculation clearly demonstrates why renting can have such a significant effect on value.

A property that may be worth €500,000 with vacant possession can represent a completely different investment proposition when occupied by protected tenants paying a relatively low rent.

And that difference has to be reflected in the valuation.

Why can it be difficult to find a valuer for a rented property?

This brings us back to the question that prompted this article.

Why are there valuers who no longer accept these assignments, or only accept them in certain circumstances?

Professional valuers in the Netherlands are subject to strict professional requirements and valuation standards, including applicable valuation standards and professional rules.

Valuing a rented residential property can require a much more extensive analysis than valuing a relatively straightforward owner-occupied property.

In recent years, there has also been considerable attention within the Dutch valuation profession regarding the correct methodology and substantiation of values for rented properties.

And rightly so.

However, this also means that a valuer must be able to substantiate assumptions relating to rent, yields, risks and valuation methodology very carefully.

Even a relatively small change in the required yield can have a substantial effect on the resulting value.

This can lead to discussions about the assumptions and methodology used.

If a valuation report is submitted for NWWI validation, it may also be subject to detailed scrutiny. The NRVT, the Dutch register for professional valuers, likewise imposes professional requirements on the performance and substantiation of valuations.

In our experience, a proper valuation of a rented property can easily require several times as much work as a regular residential valuation.

And there is another important consideration: liability.

What if there is also a legal dispute?

That brings me back to the actual case that inspired this article.

A client asked me to value a rented property in connection with a divorce. The property had to be divided financially between the former partners, while the tenants would remain in the property.

Suddenly, the valuation carries much greater weight.

The value determined by the valuer can directly affect the financial settlement between the two parties.

And imagine that one party benefits from the highest possible valuation while the other benefits from the lowest possible valuation.

The valuation report will inevitably come under close scrutiny.

For a regular 100 m² terraced house, there may be plenty of good comparable transactions available. This usually allows the valuer to build a relatively strong and transparent case for the assessed market value.

A rented property is different.

Ask ten valuers to independently value a complicated rented property and it is entirely possible that they will not all arrive at exactly the same figure. Different, but professionally substantiated, assumptions regarding rent, risk and required returns can lead to different outcomes.

If the valuation is then connected to a divorce, inheritance or other legal dispute, virtually every assumption in the report can potentially become a point of discussion.

For a valuer, that means a considerable amount of work, responsibility and potential liability.

That is one of the reasons why we have stopped carrying out valuations of residential properties in a rented state, and why it can sometimes be difficult to find a valuer willing to accept such an assignment.

Conclusion: valuing a rented property really is a different discipline

From the outside, a regular residential valuation and a valuation of a rented property may appear very similar.

After all, it is still the same bricks, roof and square metres.

But from a valuation perspective, they are fundamentally different assignments.

With a regular owner-occupied property, an important part of the valuation involves comparing the property with actual sales of similar homes.

With a rented property, a whole additional set of questions arises.

What tenancy rights exist? What does the rental agreement say? How many WWS points does the property have? What rent may legally be charged? What is the contractual rent? What is the market rent? What risks does an investor assume? And what return does the market require for that investment?

That is why a property with a market value of, for example, €500,000 when vacant and free from tenancy and occupancy rights may have a very different value when sold in a rented state.

And that is why the seemingly simple question:

“Can you value my property?”

can suddenly become a much more complicated assignment when followed by one small additional sentence:

“Oh, by the way, it’s rented out.”