I have been reading this forum for over 2 years now and see that a method often used for valuations is 14 x Yearly Rental Income.
My question is does this really apply to all homes or for just investment properties? For example, I am would like to buy a 4 bed detached in a decent suburb of Cork city and have decided to take the advice on this forum and wait a while before buying.
I have just agreed to rent a house at €1300/m…it is a 4 bed detached house, great location, priced at 875-900k at the peak, on sale now for 720k, a buyer made an offer of 590k which was refused so they deiced to rent to me!!!..using the above method this means the valuation of the house is €218,400 (1300 rent x 12 months x 14) which seems like very good value to me. My feeling is that it will never fall to this price and therefore the valaution method of 14 x Yearly Rental Income does not apply to this housetype (i.e. family houses in good locations).
I can understand that an apartment that rents for €800/m being valued at €134,400 (800 rent x 12 months x 14) because there appears to be an oversupply of apartments and 3 bed SD’s whereas in certain citys there is not a huge supply of what I am looking for - i.e. a 4 bed detached.
any advice on how to calculate the value of a property like this would be very welcome.
The house doesn’t care whether who is living in it is buying or renting.
It is obvious that the people who bought this house and are renting it to you bought it as an investment or are holding it as an investment in the hope of capital appreciation.
(a higher price)
So the valuation for investment purposes is as valid for this house as any other.
As time goes on the absurdity of valuations will become more and more apparent and those subsidising the mortgage on rental properties and seeing only depreciation will get more sick of it.
To answer your question, yes, the house you are renting will most likely fall in value to less than €250k. You may have to wait three or four years at least to see these levels.
The only way that it will not fall to this price level is if there is very high inflation in Ireland and accross the Eurozone. In this scenario the house may only fall to 500k or may even rise to €1m. However if this were to hapen a family car might cost €75k and the weekly groceries for a family of 4 could be €800 or €900. This is what hapened in the 1970’s. It is difficult to predict if wages would keep pace with high inflation.
Also remember that if the “corrrect” trend value for your house is 200k-250k, then following the type of speculative mania that we have had, prices often fall below this level as the pendelum swings too far in the opposite direction during the correction. This might appear hard to believe but stay tuned to this channel.
The main point is that the house is worth what the highest bidder is willing to pay. It doesn’t really matter what they are going to use it for. The multiple of rent rule is just a hand way of determining what an investor would pay for it and so is a rough utility value of the house.
Don’t forget any method of fundamental valuation does not take into account rational premiums either, such as good location, big garden, good aspect, whatever… These are worth different sums to different people and account for natural variance once you’re operating at an appropriate baseline.
720k, 590k, for a 4 bed detached in Cork still sounds extremely high to me but you may well be correct that there are some premiums attached to this home that may see at operate at a premium above the baseline indefinitely.
The only thing that applies to any individual property is the maximum someone is willing and able to pay for it.
When a particular individual asks what they **should **pay for a particular property a number of people use a number of approaches to try and ascertain the actual value. The rental multiplier is used on the basis that anything that makes a property nice to live in makes it nice to rent in too, therefore a nice property should attract some sort of rental premium. If a property looks nice but similar ones in that area rent at a low price odds are there are factors dragging it down.
I agree that anything over a half mill for a nice 4 bed detached is still nuts…even if it is in Cork
without using any valauation methods I feel 350k (with no stamp duty) would be a fair price. This is just because this is what I think it is worth (to me) using no specific valautaion methods and this is what I could afford to pay.
However, judging by sellers level of denial I think it will be a loooooooooooooong time before prices fall to this level.
Lastly, this is an amazing site and thanks for the free education in property. I read in a previous topic that some member is writing a book on the property boom/bust and is using a lot of extracts from this site. I look forward to the book and it would be great if the PIN emailed all members when it comes out so that I know the title and its release date.
That’s perfectly fine if you have €350k or can afford a mortgage of that amount.
Assuming you’re a single earner that would mean you’re on a salary of around €70k, putting you in the top 10% of earners in the country. It would also mean you have a deposit of 35-70k sitting around.
If the buyer who put in the offer of 590k was successful the house would cost someone who got 92% finance at 3% over 30 years 2,238 per month, so the maths would suggest you are getting a very good deal there! If it was an investor they would be subsidising you to the tune of 1000 per month to live there!
Of course that offer was “less than the house is worth”…
How and ever, the current owner may have no mortgage on the property and so no idea how over priced it is compared to what it rents for.
exactly…it doesn’t make financial sense for me (or anyone really) to buy at the moment when you look at current selling prices and current rental incomes. although it would be nice to be able to decorate it and buy the furniture that I want but not if its going to cost me 250k!
I relate very strongly to your position. I think the answer is that you can’t rely on a single valuation method. The comparison method will be quite reliable to ascertain a price at a point in time, providing the conditions of a perfect market are met-
ease of entry and exit from market (that’ll be 30k stamp duty before you can buy your house, sir)
perfect information (yeah right)
many buyers and sellers
However, given market fluctuations, the comparison method will only show where the herd is at a particular point in time.
Your challenge is to identify when the market has bottomed, so we need to refer to
a) investment value- eg rent x15;
b) or consider affordability (and preparedness to pay). eg income of purchaser x 4?5? What do you think the income of the purchaser would be?
c) identify ground zero- the point just before prices start to rise again in a sustainable manner.
Note that even rent may not be a reliable basis at this moment in time. Many purchasers will base rental decisions on shorter term needs eg they might want a 5 bed, but make do with a 3 bed; or the quality of rental accomodation may lead to a premium for the good stuff- quite possible since it seems to me many landlords were just in it for capital appreciation or are in denial.
So not an easy task. But if it’s any comfort I think after the carnage to come, the cost of a mistake will be in low 10’s of thousands, rather than 100’s of thousands.
I said this before, but in my area a 4 bed detached 10 minutes outside town rents for the same as a 3 bed semi in town, proximity to town is more important for rental market, quieter area more desired for people looking to buy 4 bed detached.
Detached houses seem to rent at similar price regardless of size of site, garage etc.
Having said that, i think the 3 bed semi rental price has further to drop and the 14x yield is still a very good calculation for all houses. But a lack of rental market outside of urban areas keeps rental prices of these houses down in comparison to smaller house only miles away.
The OP is taking about cork so might not be as rural as i’m taking about.
