Everybody be damned when it comes to property values…

Everybody be damned when it comes to property values…

Everybody be damned when it comes to property values…I ask people about the value of their homes all of the time in the course of my work and the most common response I get is ‘how do you value anything in this day and age’…. That’s when it starts, invariably I have to describe the investor method of valuations, and today I’ll share it with you all.

There are different ways to determine value, the one we tend to use in Ireland is that of the ‘comparative method’, you look at some other property that sold and use it as a proxy either adding on or taking away value based on the differences between the properties.

This method is dandy when you have transactions and it falls flat on its face when you don’t. I know I am slow compared to Usain Bolt, really slow, but I don’t know how slow I am compared to nobody – using the comparative method effectively requires something to benchmark against, and for this reason it is our opinion that this method is of little empirical use, it is the preferred method of salespeople rather than a tool for analysis.

Using rental yields to determine value is different, in this case you take the yield you see as being acceptable (we tend to use twice 1yr deposit rates as a benchmark – because property does come with greater risk there should be greater reward) and determine a value via the rental income expected.

Everybody be damned when it comes to property values…If you can get 4% on a 1yr deposit (currently you can get a little more) then we’ll go to the market looking for an 8% yield on the property. To do this you need to know what a property will rent for – this information is more readily available because there are constant transactions in the rental market unlike the sales market.

In our hypothetical situation we find that the property is listed at €195,000 for a two up two down house, and a similar property will rent for €1,050 per month. If we are to see if we can get the 8% yield you do as follows:

100 divided by 8 = 12.5 because this delivers a ‘multiplier’ which we then use to multiply the rent with for the valuation

Rent x 12 (to get annual rent) = 1050 x 12 = €12,600 and this is times 12.5 (multiplier) giving a valuation of €157,500.

So is the property at €195,000 overvalued? Yes, if you want an 8% yield it is! If on the other hand you were happy with a 7% yield then it would be valued at €180,180 using the same method – if you are happy with that then the value is not too far off.

The point is this: yields can tell you a lot about price that the comparative method doesn’t reveal.

Some people will say ‘renting doesn’t compare to buying’ and that is true, but the yields don’t lie, if you want to live in a certain area there is always the choice of substituting renting for buying and vice versa. So keep this tool in your property kit because it is invaluable when it comes to getting an opinion that popular valuation methods don’t consider!

Have your say:

  • Do rental yields tell you more about price than the comparative method?
  • Are rental yields a more realistic way to value a property? Is it a more accurate way to price a property?

 

Irish Mortgage Brokers LogoKarl Deeter
Operations Manager
Irish Mortgage Brokers
Dublin 2

There are 25 comments for this article
  1. Simon Oliver at 2:58 pm

    This is a good method for valuing property in urban areas. Not so good for the country though. Here in France, I get asked to value country estates – usually quite a few acres of woodland and pasture with a big house and a pool. The fact that part of the house (or converted outhouses) are let in summer as holiday homes does not, in reality, change the asking price that much. It should but it does not. This is because banks do not consider seasonal letting as a serious business – or at least a quantifiable business – estimating that most people cheat on their tax returns. The only way that this sort of seasonal income from part of the property can influence the sales price of the property is by running the whole business as a business – limited company and all. Then the banks are happy, mortgages forthcoming and asking price can be increased.

  2. paddy1014 at 8:17 pm

    I am in the process of purchasing a 2 up 2 down property in a large town in Leinster. Price is €55k. Add on €20 for doing up + €5 as a prov. sum = €80k. Expected rent €550pm. Yield = €6,600pa = return on capital of 7.5% all going well. Maybe I’m wrong but I think I can expect a 25% appreciation on value over 5 years!

    So here’s my calculation over 5 years: rent = €33,000 less property taxes = €31,000. Add on 25% appreciation = €20,000 total income over 5 years = €53k.

    If I were to bank €80k over 5 years on say 5% pa (generous!) = 5years x €4k less dirt and health levy (30% +4%) – €20k less 34% – €13,200. Now take inflation running at 2.5% pa = €80k less 2.5% X 5 years – inflation cost over5 years = €10,000. Nett nett gain = €3,200.

    Love to hear a few comments!!

  3. Property in jaipur at 9:40 am

    yes i agree with u nice post

  4. Karl Deeter at 7:55 am

    @Lola,

    Sorry, I meant to write to you and Andy at the same time.

    Unique/trophy homes may be in a market all of their own, but that doesn’t mean that yield is not relevant, what it can mean is that some buyers have more money than sense – fortunately they seem to be in the minority as the most impressive price drops are actually occurring at the top end of the market!

  5. Karl Deeter at 7:54 am

    @AndyK – with over 50% of residential properties in Ireland not having a mortgage on them I don’t think it is fair to say that it is all about covering a mortgage. What it is about is rewarding a level of return commensurate with the risk undertaken.

    When it comes to places with plots of land/scenic value then it can change the yield because if the location is truly more desirable somebody will pay more for it. Having said that, will said property sell for €250,000 in a reasonable amount of time? If not then perhaps that figure needs to be reviewed.

    In any case, yield is perhaps the one ‘true metric’ available and it gives a better idea for a rate of return than the comparative method does.

  6. Andy K at 9:41 am

    The yield system is flawed for the simple reason it only takes the mortgage value of the property into account, as this is what most rents on Irish properties are covering.
    For example if I have a property in say coastal county wexford on 1 acre of land with a mortgage value of 250K & say I rent it for 775 a month putting an additional 200 with it myself to cover the mortgage, based on the yield system my property would be worth circa 125K, however the yield system hasn’t taken into account the location & its scenic value, the additional monies I am putting with it to cover mortgage.
    If I seek an independent valuation of this property it would be circa 330K, in 2007 in would have been 550K, both values are based on a comparative system, I accept that the comparative system may be flawed also, but the yield system bases value on one thing only rental to mortgage value.

  7. Lola at 9:15 pm

    What about houses that are very unique being more expensive? This work for housing estates but not for ‘trophy’ houses

  8. Karl Deeter at 5:01 pm

    @Wyn I think one area that people say this falls down in is in trophy homes. Could that be that the rents achievable for them are not high enough or that the properties are over priced? Or perhaps they are in their own market segment where the buyers don’t really care?

    In any case, if you can rent out a property that would cost €2m for less than €13,000 per month then you would be better off renting it and banking the difference – the fact remains that you can use rent as a substitution for a purchase, although that doesn’t answer the pricing discrepancy! ***lots of food for thought!***

  9. wyn at 4:34 pm

    Good Afternoon Karl:

    I thought, at last, a method for valuing my house.

    Perhaps I am getting it wrong but it doesn’t seem to work for “high value” houses.

    I have a property that was going to be put on the market 2 years ago for €3.95 m. Its now valued at,say, 40% of that valuation. Your calculation suggest I would be asking for a highly improbable rent if renting was a suitable way to go.

    Perhaps it has to have another calculation built into it for higher value properties?
    Regards,
    Wyn

  10. Karl Deeter at 3:50 pm

    @Lori

    The €320k asking price may well hold, there are areas that due to the quality/location will command a lower yield – the safer something the lower the return (generally), so if you rent in a highly desireable area then yields can sometimes change a little, we merely use a benchmark of twice deposit rate based on ‘risk’.

    If your rent is 8% of 234k then that is €1,560 per month meaning that on 320k asking it’s a 5.85% yield, in your case though it means that a loan of €288,000 (c. 90%) at 4.5% would cost €1,459 so there may be an argument slightly in favour of buying there – in particular if you are a first time buyer.

    Obviously the ‘asking price’ is just that – asking – not closing price! Discrepencies always occur, the question is: does it represent a pricing anomoly or is the area so good that people want in at 6%?

    @Gil if you got a value of €150,000 based on an 8% yield it implies a monthly rent of €1,000. Bargain of the century would (in my opinion) be getting a huge discount of c. 50%, is that the case? Where is the house? It could make for a very interesting debate!

    @Gwen if people are willing to buy at below 8% then they are taking on more risk than necessary for the return given – let’s not forget that this doesn’t factor in many of the carry costs which compress the yield (NPPR tax, PRTB, house insurance etc.).

    So if they were happy to get 7% it would be valued at €130k, are you certain that houses are selling for 150k or are they just ‘on the market’?

    @Stephen the Younger: rental ‘floors’ are difficult to establish in an open market, ‘rent supplement’ covers about 90,000 households and the levels payable have been reduced in recent years so they are moving all of the time, at the same time rents generally are showing signs of stability, I get it wrong a lot but a decent 1 bed in a desirable area for €530 is a big ask, you might get a place you can share at that price for one of the rooms?

  11. Caoimhe at 3:20 pm

    In the absence of a National Property register Rental yields is probably the closest calculator of “honesty” that one can consider!

    That or just looking at the Rental Value of a property – ie. how much does it rent for, and mulitply that by x number of years – anything from 12 to 18.

    Another option i tried to use was the ppsf (price per square foot) option based on asking prices. Divide teh asking price by teh square footage of teh house and get a price per square foot. Do it on a number of properties in a location to try to assess the asking price per square foot. However, with the asking prices in fantasyland, it becomes pointless.

    The principal difficulty for many purchasers and in fairness for some EAs, is that many sellers REFUSE to accept reality – ie. if my neighbours house went for a million in 2007, then mine should go for 900,000 today. Realistically asked for prices reveal houses which sell. And some are selling.

    Houses up for a number of years are either priced too high, have inflexible sellers, or have sellers who are not serious about selling.

    NAMAs recent intrusion into the domestic market leads me to consider their own calculator from here on in!! 10 years the annual rent.. :-)))

  12. Frank at 3:02 pm

    I loved the comparative method during the boom. Its working also depended on their being enough idiots willing to pay too much for something and enough idiots to lend them the money. Wasn’t it just the perfect storm!

    Sorry to dumb down the discussion but the real value of a house is simply the cost of the land + the build/rebuild. The rest is the buyers abilty to pay. And that friends is down to the bank. Banks set house prices not estate agents. When banks would only lend three times your income the average house price was roughly that. When you could get 10 times… guess what!

  13. Stephen at 2:52 pm

    @Sean Walsh
    Any property is a rental property if the owner rents it out. (Gil and Gwen, for example, both turned their PPRs into rental properties).
    Prices are not different for investors vs non-investors.

  14. Sean Walsh at 2:21 pm

    Rental yields is a good indicator of price for rental properties

  15. SueP at 1:40 pm

    This method shows that there is still a way to go before prices have fully ‘corrected’ and if more people used it then perhaps we would start to see some real value for money. The market is still way over-inflated for the quality of the property in this country.

  16. Stephen the Younger at 1:27 pm

    The landlords dole is going to be slashed soon, so the artificial floor created by rent allowance will be redduced. This is a mathematical certainty.

    Thank god.

    This is the reason I cant rent a 1 bed flat for less then 530 in dublin.

    So do work in an assumption that rent yields are going to fall a lot more from that.

  17. Graham Geraghty at 1:14 pm

    Good thinking alright,must use this method,hoping to buy soon!

  18. Stephen at 1:11 pm

    @Gil
    The point is that a (good) investor will do the maths and simply not purchase your property for anything more than 150k if s/he is looking for a yield of 8%.
    Don’t forget a property investor needs to look for that kind of yield to ensure it’s a reasonable investment because s/he has to account for empty periods and maintenance which will bring the return down below that 8%. Why bother tying up your money in a property which takes time to get out of if your return is no better than other more flexible options?
    Investors are a vital part of the market and they are a significant factor in defining house prices. The problem in Ireland over the last ten years has been there were a huge number of amateur investors who didn’t have a clue about calculating yields. That works out fine when house prices are climbing, as the return is in capital appreciation. But we’ve seen the end of those days for the next several years, so it’s back to the professional investors who will offer prices that provide a proper yield. And when you’ve got investors paying 150k for houses like yours to get the yield they need why would other people pay much more?

  19. gwen at 1:02 pm

    Yes I agree with Gill, i rented my house which is just a little short of covering itself and rent in a better location, if i value my house using 8% yield i get €114k, similar properties in the area are on the market for €152k,

    I question using 1yr deposit rates at 4%,,meeh it doesn’t take into account tax effects on the 4%, if you did then it would be say 3% x 2 at 6% giving you a multiplier of 16.66, that would make the house in the example valued at 209,916.
    its all open to interpretation, i think the real value is what a person is willing to pay!

  20. Sean McCabe at 12:56 pm

    I don’t believe the rental yield calculation method is accurate to every single property. I agree with Gil that if I applied that method to my property and then sold it for that price I would be getting robbed even in this depressed market. Sorry Karl but I believe it’s case by case and the comparative method is more realistic.

    Sean – Raheny

  21. Peter McKenna at 12:43 pm

    That’s a good method of valuing something alright, I never looked at property in that light before.

  22. Gil at 12:26 pm

    I have moved out of my house and rented it out (upgrade to nicer rented accomdation). According to your calculation my house is now worth €150,000. If I advertised my house at that price, someone would be getting the bargain of the century – in fact i’d nearly buy it back off myself for that price. The rent is covering the mortgage (for now), and I dont consider myself to be in trouble with the mortgage. I think that valuation is pants.

  23. Lori at 12:25 pm

    By this calculation the house I am renting at the mom would be valued at 234k (being very generous). I’d love this to be true but houses the same size are currently advertised in the region of 320k. Bit of a difference eh? I’ll try offering 100k less than the asking price and see how it goes…

  24. Paddy, happy renter of a very nice property at 12:25 pm

    Rental yield is the best way to value most properties, I did the maths in 2006, and in spite of EVERYONE in the property business telling me I was mad or at lease naive sold my (mortgage free) house and now rent. Best decision I ever made!
    Never believe a so called ‘property expert’ who earns his living as a result of commission, just do what is logical and you will be OK.

  25. Lars hansen at 12:22 pm

    Do you really get an 8 percent CAP yield in properties in Ireland?