# Real Value Calculation

Discussion in 'Real Estate' started by jamesandrewnz, 17th Jun, 2007.

1. ### jamesandrewnzNew Member

Joined:
7th Jun, 2007
Posts:
3
Location:
Auckland
I am having trouble with the Real Value = Actual Annual Rent/5 year yield.

If I have a weekly rent of \$350 this equates to annual rent of \$18,200.

If the yield is 4% then the Real Value of the property is \$455,000 which seems about right.

but if the yield is only 2% the Real Value is \$910,000.

Surely the value of a property in a low growth area would have less value, what am I doing wrong?

2. ### Simon HampelCo-founderStaff Member

Joined:
9th Jun, 2005
Posts:
4,623
Location:
Sydney, Australia
If yields are low and prices aren't rising - it either means the entire area is dead or else values are going to rise (thus bringing yields back in line with very long term averages).

Extremely low yields aren't sustainable in an area which isn't growing in value - unless there is something artificially restricting growth (such as no or negative population growth, government legislation, extreme isolation, etc).

Are we talking about a suburb in a large populated area ? Or a small country town with limited local industry ?

3. ### coopranosWell-Known Member

Joined:
11th Oct, 2006
Posts:
498
Location:
Perth
What does this seem "about right" compared to? I would think that the yield % is derived from the Property value and the rent, rather than the rent or property value being determined from the yield %. As you say 2 houses in different suburbs/streets/states could have the same weekly rent but completely different values.
Im not sure that rent gives any real indication about a property value by itself with an arbitrary yield. What if a property is fully furnished and gets \$20 more rent a week than the exact same unfurnished house next door? Does that mean the property value is a lot more?

4. ### jamesandrewnzNew Member

Joined:
7th Jun, 2007
Posts:
3
Location:
Auckland
Hi Sim,

I am talking about Auckland. I am looking at investment property in different suburbs. One has average growth of 4% and the other of only 2%. Both houses are similar in size etc. but one is in a better area, the 4% one. The price tag is higher on this house but when you do the calculation the house with 2% growth is twice the real value of the 'better' suburb one.

5. ### Simon HampelCo-founderStaff Member

Joined:
9th Jun, 2005
Posts:
4,623
Location:
Sydney, Australia
I don't know much about NZ property ... but as a general rule, I would expect over the long term, growth + yield should be fairly constant ... unless external influences come into play (which also includes gentrification, new transport links etc).

What is the current yield on those suburbs ? With such low values, I would expect a high yield (10%+) ?

6. ### JacqueTeam InvestEd

Joined:
16th Jun, 2005
Posts:
1,885
Location:
Sydney

7. ### jamesandrewnzNew Member

Joined:
7th Jun, 2007
Posts:
3
Location:
Auckland

8. ### JacqueTeam InvestEd

Joined:
16th Jun, 2005
Posts:
1,885
Location:
Sydney

9. ### MattRWell-Known Member

Joined:
23rd May, 2007
Posts:
229
Location:
Sydney

10. ### JacqueTeam InvestEd

Joined:
16th Jun, 2005
Posts:
1,885
Location:
Sydney
Exactly! The basic fundamentals of investing also need to be factored in, when deciding on property. I won't repeat them here, but they are in one of the articles entitled Due Diligence here on the site, for those who need a refresher.

11. ### YossarianNew Member

Joined:
2nd May, 2007
Posts:
1
Location:
Sydney
Where is this formula from

Sorry jamesandrewnz,

Just wondering where you got this formula from. I would say that the obvious answer to your question is that the formula does not work, ie it is wrong.

12. ### JacqueTeam InvestEd

Joined:
16th Jun, 2005
Posts:
1,885
Location:
Sydney
Hi Yossarian

The formula is actually taken from Steve Navra's Rental Reality- if you go to Articles on this site, you'll find it under the Real Estate section.