Strictly speaking, the other closely related charges, such as interest and depreciation, do not affect net rent, although they must be included when considering net returns. The fact that an owner is obliged to pay interest on money which he has borrowed on a mortgage secured by a piece of property, in no way affects the net rents; for the existence of the mortgage does not of necessity affect the value of the property, though it may materially affect the returns obtained by a purchaser on the amount which he has to pay for the property.
As a simple example, take an office building worth $200,000, yielding gross rents of $16,000 a year, and forming the security for a mortgage of $100,000, bearing interest at the rate of 6% per annum. The gross earnings of $16,000 are entirely independent of the mortgage and constitute 8% of the value. In order to buy the property, however, a purchaser need invest in cash only $100,000 and assume the existing mortgage. The result is that he which is a gross return of 10% on the investment, although the gross rent is only 8% on the value.
receives gross rentals of....................................
From which he pays interest at 6% on $100,000..
Leaving a gross return of..................................
In other instances, e.g., where the land is occupied by buildings not commensurate with its value, the rate of interest may exceed the percentage of gross rentals, and the result obtained will be opposite to that shown in the above example. The principle, however, remains unchanged.
It is impossible to do more than indicate the factors which must be considered in determining the net rents, as in practice they depend largely upon local values and conditions.