Help. How do I know what to offer for a property?

Hi all
As part of our little project I want to add a section instructing a buyer on ignoring current market prices and making an offer that is fair under normal market conditions.

How do I price a property?

  1. 10 times monthly rent.

Any ideas?

BB.


“Just When I Thought I Was Out, They Pull Me Back In”

You’ve got to kick off with the line.

“A property is worth only what someone, i.e. you, will pay for it.”

My take is as follows

If you reckon mortgage or rent @ 25% of net monthly earnings you won’t go too far wrong ( for a single earner ignoring any potential rental income)

As for purchasing a rental investment reckon on 12.5 times rent for a gross yield of 8%

slightly OT but mention something about holding firm with initial offer and waiting for the vendor to come to their senses and contact you back. patience will save lots of euros. dont get involved in a bidding war with yourself.

Net yield (gross less costs and allowance for voids) = long term cost of funding +2% (c. 7.5% if well heeled and margin of 1%), desirable location = premium anything up to infinity but should be 20-35% for the middle class locations.

What do you mean by ‘normal market conditions’?

Thanks all. Great so far. :smiley:

McAlpine, I think you’re talking about affordability or the maximum mortgage someone should take on with the 25% of net monthly. How do you feel about instead using rental yield as a proxy for value?

County by County Incomes are here , these should help calculate rents and property values

cso.ie/studentscorner/StatFa … County.htm

Around 50% of 2006 prices

Thats a useful ‘hard’ number DE , I agree.

No doubt. And that would satisfy me but I was hoping for more technical formulas.

A US rental income valuation method for single family homes.

redbrickpartners.biz/images/SFH_Yields_new.pdf

very different tax regimes though Duplex, we dont pay no county and city taxes …except rubbish.

First post alert!!

property is valued the same way every other asset class is valued: discount the stream of future income at an appropriate rate

I would argue that you can value a house as a perpetuity, i.e. an infinite stream of future cashflows since by the time you sell a house, assuming you’ve maintained it, it will appear to the next owner as having an “infinite” future life. This also has the advantage of simplifying the maths considerabley. A perpetuity is values as V = C/i
Where C is the net annual rent
and i is the minimum expected return you require to invest in property over cash (i.e. a risk free investment), say this is cost of funds +2.5% (will vary according to investor). 3 month EURIBOR is currently approx 5%.

So

Take a property renting for €1200 p/m. Say net rent is c. 10000 (11 months rent - tax after relief & write offs)

Value of property is 10000/.075 = €133,333

Thanks weathervane this is the kind if stuff I’m looking for.

True but its the approach, accounting for each element of holding cost that’s important. An Irish version of the rebrick rule would require some tweaking. Weathervane’s suggestion of constructing a discount rate based on a risk free yield, then adding points for sector risk etc. has a lot of merit.

Geckko. I was hoping you had something. :smiley:

Little point buying a place you can’t afford as the likely hood is that others will not be able to afford it either.

People used to buy premium property for Capital appreciation and property with high yields for the rent roll as you cant buy premium without the capital or the cash flow.

Rental yield can be a poor indicator of Value. Historically the yield on desirable property was quite very low. Take areas like Dalkey for instance.

The factor that drives value is the amenity of the property, proximity to services, potential development opportunity, or redevelopment opportunity.

There are about twenty indicators that drive property prices in an area.

They include

The proportion of people under 34 years in a locality, (future demand)
New Shopping Center Investments
New Transport infrastructure
Availability of Good Schools
Parks
Mature trees
Proximity to office space
Good restaurants
Religious infrastructure
Sports Clubs
Playing Fields
Heritage Buildings
Hotels

The availability of Building Land in close proximity.

Rental yield is only useful in town or city properties where there is a rental market. Rural properties are a lot harder to judge by this method.

Another method, (and should apply to all properties) is the replacement method.

SCS guides about €150 per sqft rebuild cost which is probably a lot higher than the reality.

So, get the sq footage of the property, multiply by about €100 per sq ft, then add a figure for the site. A semi D site outside Dublin is worth about 60K. Maybe for good measure then throw in about 10-15% for the fact the the house is built so you don’t need to go through the hassle of building yourself. Also, the €100 per sqft is for a new unfurnished house.

Hopefully should come somewhere near the “value”.

The site value is the hard bit though and is where you can take account of premium locations.