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.
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