RENTx12x14 Discussion

Long time lurker - first time poster.
Have been reading a lot of the posts on here and one thing continually pops up. There is a formula used which is RENT x 12 x 14. I dont disagree with the valuations it comes up with but should the 14 not be 25? I mean most mortgages dont have a 14 year term or is that the average length of a mortgage ?

It’s not the length of the mortgage it’s the yield.

An asset price of rentX12X10 gives you a 10% return on your investment and rentX12X20 gives you 5%. Typically 14 is picked to account for voids plus wear and tear costs.

Multiplying by 14 doesn’t have anything to do with the length of the mortgage.

When you value a house as rent1214 you’re basically saying that the gross rental yield on the house would initially be about 7% (1/14=0.071)

If you used rent1225 the initial gross rental yield is 4% (1/25=0.04).

Edit: cross-posted with sharper

Ok right I see. Is that not a very high yield though? 4% would even seem high in the curent market?

As far as I’m concerned the 14 represents the yield, i.e 7%.

So let’s say you’re buying an “investment property” for 500k, a desired expected return before expenses would be 7% so you would do the following calculation: 500k / 12 / 14 to get approx €3,000 as the required rent.

Some may replace the 12 with an eleven, cos you cant guaranteed renting it out for 12 months a year…

The opposite can obvioulsy be done when you have the rental figure to hand, to determine an appropriate value.

You’ll get a fright when you look at rental prices v for sale prices for similar properties on daft. The yield is often appalling!!

Nobody buys a rental property for a couple of years so you have to consider long term returns. A 7% return over 10 years is hardly fantastic.

Less than that and you might as well put the money in a bank account.

Especially when you can get 7% down with Anglo but of course, that’s as risky as property investment! :laughing:

True but the current market is arguably still overvalued.

Property as an asset class ought to be compared with all the other options for your money - cash, equities, government bonds, corporate bonds etc. Even on a comparative basis, Irish property still looks overvalued in my view.

12x-14x annual rent is a reasonable starting point when looking at property as an investment, but as you point out, you would be hard pushed to find anything in Ireland that you can buy using this valuation measure.

Not at all. 7% is about the going rate for commercial property … id/3272141

4% would be a high yield in residential only because the asking prices are still a complete joke.

4% might be ok if the underlying asset was appreciating considerably. But where it’s depreciating considerably, your yield better be way higher to make up for this. Like around 20%.

10 year Irish Government debt is currently yielding 5.79%, a rental property would be considered riskier than this so the yield should be higher.

If you had sharply higher rental expectations over the next few years then that might justify a lower initial yield, but where are higher rents going to be coming from?

Is this 5.79% available to us small fries or only for the institutional investor?

Government bonds also do not require letting agents, management fees, PRTB registration, landlord’s insurance, property tax [coming soon] and they won’t ring you on a Sunday because the heating isn’t working. Not to mention void periods, declining rents, massive oversupply and shrinking capital values.

For all the hassle and expense of being a residential landlord you’d be looking for a big premium over government bonds.

You can buy any size you like as far as I’m aware, by going into a post office or bank. I’ve never done it myself so I’m not familiar.

Interest rates are only likely to be moving in one direction though.

Anyway, back on topic.

can anyone explain to me why the re-sale value of the property is not (does not seem to be anyway) taken into consideration?

The yield is calculated at a fixed point in time based on the current resale price.

It’s the time value of money.

Because we are drawing on analytical techniques taken from the ‘money’ section of the newspapers. The ‘business’ section of the newspapers would certainly take it into account. :nin

Can this method be used seriously then?

Example using this formulae on a house bought in a normal functioning market, and this functioning market remains for the next 20 years.

2 bed house rents for €1000 pcm now, so as a precaution im going to value its rental at €800 pcm

800 * 11 * 14 = €123,200 (perceived value for investment with 7% yield)

If I was to get a 80% Loan for this investment @ 7% interest my repayments would be 764.13 pcm over 20 years

My deposit is €24,640, and I spend €10,000 on furniture

Assuming the rent income over the 20 year period covers mortage payments and maintenance to the penny, and my house value has kept with inflation at say 2%

After 20 years my investment of €34,640 has now turned into a bought and paid for house worth €183,000, plus future rental income with no mortgage servicing!

If I was to invest this €34,640 elsewhere with a guarenteed return of 7% per year over 20 years, My return would be €177,081

I used this calculator … ulator.htm

Im not even taking into consideration that rents received over the 20 years will likely turn a good profit on their own later in the mortgage term as rents will more than likely overtake the cost of sevicing the mortgage.

Please let me know if im missing the point here

I think that while yield certainly applies to investment property (and even more so now that capital appreciation is gone for 15/20 years) I dont know if its logical to apply it to a family home. You are not expecting a yield from that. I think the 3/4 times avg wage is more sensible.

My guess is house prices will fall to somewhere between the 1998 and 2001 prices.
Year|Dublin|Rest of Country
Year|Dublin|Rest of Country
In the first four months of 2009 the average price paid for a house in Dublin and outside Dublin was €331,206 and €214,445 respectively

2001(Further 25% drop) best case and 1997 (Further 50% drop) worst case. We have a LONG way to go.