Using yield and completely ignoring asking price

[Mouldy]

I’ve read with interest some of the threads discussing rental yield, especially as a general yardstick with which to measure the bid one should place on a property, particularly apartments.

Due to personal circumstances my wife and I will be moving to the city centre of Dublin and will rent out our house. From a cash flow perspective, we can’t afford to rent the house and rent an apartment but we do have a lot of cash, so hoping to buy an apartment outright and live in it. For the purposes of this discussion let’s assume that it will be a cash purchase.

The rents in the neighbourhood we’re looking at are around 1500, some more, some less. The apartment we are looking at is a fairly large 2-bed and its extra size seems to be prompting a very high asking price. Since been incinerated during the boom, I’m no longer interested in anything EAs have to say. I want to make an offer based on what I thing the apt is worth and I’m planning to use the rental yield to do that. Even If I never rent it out, the next owner probably will and they will be using yield to arrive at their offer price.
So all else aside for now, and looking at DAFT.ie’s lasts claim that south city 2-beds are fetching 6.4% yield, can I ask the experienced among you the following questions (without getting into a discussion about house prices!!!!)

1. I’m going to look for a 7% yield as a starting point. Do I take the gross figure or the net (Gross-minus Mgmt fee and maintenance) figure as the actual yield, or do I make some kind of allowance and arrive at an average number?

2. Using even the gross 7% figure and the much vaunted 15*rent figure, I’m still coming in well south of the asking price. Are EAs deliberately over pricing properties in the knowledge that buyers will simply shave 25% off and then make an offer?

3. Can anyone give me general advice about valuing a property based on location and rental yield? I’m doing as much as I can but apartments are new animal for me.

Thanks
M

 

[Brendan Burgess]

From a cash flow perspective, we can’t afford to rent the house and rent an apartment but we do have a lot of cash, so hoping to buy an apartment outright and live in it.

I understand what you are saying, but it doesn't make a lot of sense to me.

If you have a lot of cash, don't worry too much about cash flow.

If you already have a property, you probably should not be buying a second property.

Do you have a mortgage on the house you are renting out? If you do, you might be better off conserving your cash as it will mean maximum flexibility. For example, if a deal becomes available which gives discounts on early redemption of mortgages.

If, by any chance, you are in negative equity, you should defintitely keep enough cash on hand to clear the negative equity, if you want to sell the property at some stage.

I am just worried that you will arrive at some mathematical formula which will decide the price on the property you want to buy and will indicate that it is "good value". There are far wider considerations for you.

It might be worth doing a sort of "money makeover" to get the combined wisdom of AAM'rs.

Brendan

 

[Mouldy]

Brendan thanks a million for the reply. I’ll consider the Money makeover but I’m still interested in opinions on my original post. That said, your advice has got me thinking about this in a different way now. Thanks again.
M

 

[ryaner]

Properties yields, while a good starting point, do not show everything. Each house is just that little bit different or while have different costs to outfit it to suit your purposes. Use it as a guide, but not a hard and fast rule.

One thing about apartments is that some areas have very high vacancy rates and be very very wary about this. Usually it means the management company is also going to be having some issues as their is less people paying fees. Some of the worse places are like ghost towns and frankly I wouldn't fell safe there at night.