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Real Value Calculation

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

  1. jamesandrewnz

    jamesandrewnz New Member

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    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 Hampel

    Simon Hampel Co-founder Staff Member

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    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. coopranos

    coopranos Well-Known Member

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    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. jamesandrewnz

    jamesandrewnz New Member

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    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 Hampel

    Simon Hampel Co-founder Staff Member

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    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. Jacque

    Jacque Team InvestEd

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  7. jamesandrewnz

    jamesandrewnz New Member

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  8. Jacque

    Jacque Team InvestEd

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  9. MattR

    MattR Well-Known Member

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  10. Jacque

    Jacque Team InvestEd

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    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. Yossarian

    Yossarian New Member

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    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. Jacque

    Jacque Team InvestEd

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    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.