Setting purchase price as a multiple of rent - according to this link...

I got told the rent theory to a properties value when I first started. It was stupid then and its still ridiculously stupid now. I find so many properties that rent is low because the landlord is happy with the tenant and doesn't want to "bother" them with a rent increase.

 

I've multiplied rent out before to get a purchase price and emailed the selling agent with my calc. It worked once

 

How do you know it is low?

 

When I got my unit in Harris Park valued in 2014, the value came back as the rent with three zeros on the end. Coincidence? Lazy? Both the rent and the value given were very modest.
But not the same with the other property valued at the same time by a different valuer.

 

Did this on my last purchase

 

Well at the moment I've got two units in the same complex rented for $160-$165 between them. A unit comes on the market with the current rent at $135pw in same condition.

 

So every property should be (roughly) neutrally geared then?

 

'should' is an interesting choice of lexis
... not saying should or shouldn't, just how it was valued. At that point in HP the valuers seem to have decided that yield and value were relative - as per some on this thread. I don't agree, especially as I keep my rent on the lower side for a very good tenant.

 

So couldn't you work out a rough value using 160-165 (market rent) and comparing the yield for the asset in that suburb?

Even if you didn't own two in the block you can use re.com to see comparable rentals.

 

Couldn't you work out a rough value using comparable sales though.

 

Never said you couldn't but it is a other tool in the tool box.

Let's pretend you are looking at two different units in two different complexes for the same suburb where the median yield is 5% and all costs are the same.

Unit 1 is advertised for 500k and comparables in that complex has 490, 480, 470k. However other units are renting for 400 each.

Unit 2 is advertised for 430k and comparables is 410, 400 and 390k, with comparables rent being 450.

To me unit 2 is selling far below what its potential and the first unit people have been over paying.

If I go to an auction for either of these units and win for 1,000,000 does that mean all units in the suburb are now worth 1M! Using just comparables only you would need to say potentially but using the yield you would say no.

Just cause you can hammer a nail in with a screw driver doesn't mean you don't need a hammer.

 

Properties that are classed as strictly investment are often valued in this way. Commercial property obviously. But also blocks of residential units (all on one title) are often valued in this way. An owner occupier is not going to buy a whole block of units... a purchase like this attracts investors and it's all about the numbers. In some cases the likely end value post-strata-titling will also be factored into the asking price.

It can be a very nice thing in some ways - you put the rent up and have created instant equity.

 

That's how cap rates work

Provided you're considering net returns.

 

This is the primary methodology used for valuations of residential property. Comparability is essential.

 

Frankly there are quite a few concepts that I'm discovering people use to value properties which are quite different to how I think. I think rent in an investment property should absolutely equate to value of a property, it isn't necessarily the end game but should be a significant factor. If rent is low simply to keep a good tenant then I would question what I am afraid of.... if I'm afraid of getting a bad tenant then maybe I need a better property manager...... if I'm afraid of it being vacant then I would be thinking maybe my property isn't at the level of demand I think it is or maybe it isn't worth any more. If you the property is worth more and you have a good PM then I would increase rent.

Comparability in residential sales is logical because the market is not just investors it is owner occupiers so there is an aspect of emotion involved there so it doesn't come down to facts and figures when a value is reached.

I am also perplexed by the significant focus on a top down investment approach (look at what is performing well in a sector/geographical region and pick something in that area) to real estate portfolios. Personally my approach is more bottom up, I think it is important to look at each property on its merits. I've learnt a lot about how others invest and select their properties which is very different to my own approach, I'm not saying one is better than the other, its just different and something which I want to understand further. I am naturally risk adverse which means I really don't want to lose capital value so my focus on reducing risk is to ensure continued rental demand for my properties so even if they lose capital value in the short term (I don't think they will) it doesn't affect my ability to service the debt. Rental demand and return are a significant focus for me in addition to ensuring that I have minimal repairs and maintenance ie. new being preference to old, longevity of building materials etc. Net rental income is what is going to sustain me through retirement so my focus is on yield and using that to service debt and expenses.

For me the risk of chasing capital gains in one market to the next is high, similar to day trading in shares (not that people buy and sell like that in real estate but hopefully you get the drift) - there can be big gains made with the right decisions however it is risky and there can be losses as well.

So to sum up, I think a focus on the demand for the property as far as rental, the yield, depreciation and expenses on the property is a significant factor. The top down approach of picking trends, getting in on the up swing and getting out at the peak or as close to is for people with way more guts then me.