House value estimation

C

cheekychops

Guest
I heard yesterday on the radio that you should be able to calculate the value of a house from the rental income achievable on the property. Does anyone know this formula
 
Not really relevant in the current market. Yield basis of valuation works on the premise that properties are transacted based on expected investment return. In the residential market currently there are very few transactions by investors. Theoretically you can use a yield valuation but its far better to examine a range of current asking prices for similar properties advertised.
 
cheekychops said:
I heard yesterday on the radio that you should be able to calculate the value of a house from the rental income achievable on the property. Does anyone know this formula
Click to expand...

You could use:

R / (i - g)

R = Annual rent less expenses
g = long term expected annual increase in rent
i = return from alternative investment %

Take a 3 bedroom house that rents for 1500pm or 18000p.a.
Say maintenance costs are 5000p.a. long term
Assume that rent will grow 2% p.a. long term.
Assume you'd get 5% as a reasonable rate of return on investments.

(18000 - 5000) / (.05 - .02) = 433,333

In the above example you are simply comparing paying rent to buying a house and living in it yourself i.e. valuing based on the rental outgo you'd have otherwise paid.

An alternative valuation involving you as landlord would require you to make allowance for:
1) income tax on rent received
2) a higher required rate of return to compensate for the risks (e.g. possibility of not being able to rent the property.

In such a situation, depending on tax, the house might be worth half of the above valuation to you as an investment property
 
OP it's probably the rent x 12 to 15 to get value formula. Very simple formula.
 
Hi Bronte,
Can you post this formula please
 
The old rentalization "valuation" referred to commercial properties and used the projected annual rental returns for 10 years.

This gives a lower figure for the house valuation, but this may reflect the demand - as a house - rather than figures achieved for alternative use as a rented unit.

Irish people have always put a premium on owning their own place as opposed to renting - we probably have memories of the Gombeen Man from the 1800's embedded in our DNA.
 
cheeky chops -this rental yield thing can be very misleading as regards getting a value on a property .

You may get 12k p.a. in Dublin apartments which sell at 120k - that's 10% gross. After various costs this could mean 8% pre-tax. That's twice the top bank rates.

But in an average Dublin suburb 3-bed semi you may still get only 12k p.a. rent- same as the city-centre apartment , yet the house price is 240k which ,after costs, may mean only 3 -4% pre-tax return.

Based on the rental yield formula, the apartment is great value and the house is grossly over-priced. Logically, the house will drop to the apt price of 120k -or the apt will increase to 240k. But I doubt that either will happen.

There are many many factors in property price determination- above all how much does one want to buy and live in a certain property in a certain area. (e.g. Dalkey is a very dear area - but rental yields are only 3% gross for houses.)

So, The rental yield formula is only -marginally -worth considering if you are only interested in renting it out and obtaining a reasonable return, whichh in these days is never guaranteed.

cheeky chops - look at daft.ie and other sites and compare selling prices and letting prices in same areas.
 
+1. Yield values are useful if you are buying a property as an investment only. Otherwise they are really not relevant to the current market for residential property.
 
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