| Property Rental Income VS Purchase Price [message #382809] |
Do, 20 April 2006 00:22 |
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Hi,
I'm sure I've seen this before somewhere but can anyone tell me the
quick calculation used work out if a property is worth buying for
rental purposes taking into account the purchase price and expected
rental income?
Many thanks
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| Re: Property Rental Income VS Purchase Price [message #382819 ] |
Do, 20 April 2006 08:35 |
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shaun wrote:
> Hi,
>
> I'm sure I've seen this before somewhere but can anyone tell me the
> quick calculation used work out if a property is worth buying for
> rental purposes taking into account the purchase price and expected
> rental income?
Divide the purchase price by 144.
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| Re: Property Rental Income VS Purchase Price [message #382825 ] |
Do, 20 April 2006 11:29 |
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Thanks for your reply,
could you explain how this works, and how I evalute the result of this
calculation please?
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| Re: Property Rental Income VS Purchase Price [message #382832 ] |
Do, 20 April 2006 12:46 |
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"shaun" <shaunthornburgh [at] hotmail.com> wrote:
>Hi,
>
>I'm sure I've seen this before somewhere but can anyone tell me the
>quick calculation used work out if a property is worth buying for
>rental purposes taking into account the purchase price and expected
>rental income?
>
>Many thanks
To get the Yields you do:
(yearly rental divided by total value of house) times 100.
Hope this helps.
Andy
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| Re: Property Rental Income VS Purchase Price [message #382834 ] |
Do, 20 April 2006 13:11 |
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shaun wrote:
> I'm sure I've seen this before somewhere but can anyone tell me the
> quick calculation used work out if a property is worth buying for
> rental purposes taking into account the purchase price and expected
> rental income?
Depends whether you're investing for income or gain, and buying
outright or with a loan.
Take the expected annual rent and divide it by the property value.
This is called the yield. Depending on location and market this could
be as low as less than 6% and more than 12%. Multiply by a fiddle
factor to take into account the extent of likely voids. This could
be as small as 10/12 if, for example, you let to someone for 6 months
and then they move out and you take a bit more than a month to find
replacement tenants. So your 6% is now 5%. [It could be worse - you
might not get *any* tenants].
Deduct expenses: Insurance. Gas certification. Letting agency fees
unless you self-manage. Miscellaneous repairs and provision for
routine maintenance and redecorating. Budget 20% for agency fees, so
your 5% is now 4%. No, sod that for a lark. Fire your agent, and do
the work yourself [no pain, no gain] and keep it at 5%. Insurance etc
brings it down to, say, 4.5%.
So ask yourself whether you could get 4.5% for your money much easier
by simply depositing it with a bank, and the answer is probably yes.
So you need to look for much higher yields than 6% to make it all worth
doing.
If you need a loan, it's even worse. Say you borrow half the purchase
price, and loan interest is charged at 6%. That reduces your 4.5% to
1.5%, but you're only putting up half the money, so your return on
invested capital is 3%.
But now factor in expected capital growth [or loss, if you expect
property values to fall]. Any of this is added directly to your
return, so if you expect values to go up 10% a year, your no-loan
4.5% becomes 14.5% just like that (only you don't see the extra 10%
until you sell - or remortgage if you're a daredevil). But this,
unlike the revenue stream, improves with a loan. The key word here
is "gearing". If you only put up half the money and borrow the rest,
the 10% gain represents 20% of your investment, so your 3% becomes 23%.
If you only put up 20% of the capital, the 10% becomes 50% but as
you're borrowing 80% of the price at 6%, that represents 4.8%, so your
4.5% basic rental return above becomes -0.3%, representing -1.5% of
your investment, so you're losing money hand over fist until you sell,
at which point your profit becomes 48.5%.
Do you get the general idea?
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| Re: Property Rental Income VS Purchase Price [message #382835 ] |
Do, 20 April 2006 13:15 |
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shaun wrote:
> Thanks for your reply,
>
> could you explain how this works, and how I evalute the result of this
> calculation please?
If you divide the price by 144 you get about 7%. I think he means that
this represents a watershed figure. If the yield (annual rent divided
by price) exceeds this amount, you'll probably do OK, and if not, you
probably won't.
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| Re: Property Rental Income VS Purchase Price [message #382846 ] |
Do, 20 April 2006 14:55 |
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> shaun wrote:
> > could you explain how this works, and how
> > I evalute the result of this calculation please?
>
"Ronald Raygun" wrote
> If you divide the price by 144 you get about 7%.
Eh? Isn't it rather 0.7%?!
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| Re: Property Rental Income VS Purchase Price [message #382847 ] |
Do, 20 April 2006 15:10 |
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Tim wrote:
>> shaun wrote:
>> > could you explain how this works, and how
>> > I evalute the result of this calculation please?
>>
> "Ronald Raygun" wrote
>> If you divide the price by 144 you get about 7%.
>
> Eh? Isn't it rather 0.7%?!
Bah! What's a mere factor of 10? Maybe he meant to divide by 14.4.
Oops.
No, he probably meant to divide the price by 144 to get the
watershed *monthly* rent. That would correspond to an 8.3% yield,
which also sounds reasonable. Probably a bit more realistic
than 7%, in fact.
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| Re: Property Rental Income VS Purchase Price [message #382848 ] |
Do, 20 April 2006 15:15 |
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> > "Ronald Raygun" wrote
> >> If you divide the price by 144 you get about 7%.
> >
> "Tim" wrote:
> > Eh? Isn't it rather 0.7%?!
>
"Ronald Raygun" wrote
> Bah! What's a mere factor of 10?
The difference between buying or not? ;-)
"Ronald Raygun" wrote
> Maybe he meant to divide by 14.4.
I wouldn't know why he'd choose that figure, though...
"Ronald Raygun" wrote
> No, he probably meant to divide the price
> by 144 to get the watershed *monthly* rent.
That's what I thought - a clue
being in 144 being a multiple of 12.
"Ronald Raygun" wrote
> That would correspond to an 8.3% yield,...
That's better!
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| Re: Property Rental Income VS Purchase Price [message #382861 ] |
Do, 20 April 2006 16:48 |
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Ronald Raygun wrote:
> shaun wrote:
>
>> Thanks for your reply,
>>
>> could you explain how this works, and how I evalute the result of this
>> calculation please?
>
> If you divide the price by 144 you get about 7%. I think he means that
> this represents a watershed figure. If the yield (annual rent divided
> by price) exceeds this amount, you'll probably do OK, and if not, you
> probably won't.
Bollox! The percentage is dependent on the price you are dividing into.
Go back to skool yung man and learn proper.
Irma
Inviato da X-Privat.Org - Registrazione gratuita http://www.x-privat.org/join.php
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| Re: Property Rental Income VS Purchase Price [message #382863 ] |
Do, 20 April 2006 17:03 |
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> Ronald Raygun wrote:
> > If you divide the price by 144 you get about 7%...
>
"Irma Troll" wrote
> ... The percentage is dependent on the price you are dividing into.
Care to explain how on earth you get that?
For instance:-
If price is £72,000 then dividing by 144 gives £500 which is 0.7% of
£72,000.
If price is £144,000 then dividing by 144 gives £1,000 which is 0.7% of
£144,000.
If price is £288,000 then dividing by 144 gives £2,000 which is 0.7% of
£288,000.
In other words, the percentage is **always** 0.7%...
How could you possibly get any other value?
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| Re: Property Rental Income VS Purchase Price [message #382878 ] |
Do, 20 April 2006 19:33 |
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Tim wrote:
>> Ronald Raygun wrote:
>>> If you divide the price by 144 you get about 7%...
> "Irma Troll" wrote
>> ... The percentage is dependent on the price you are dividing into.
>
> Care to explain how on earth you get that?
>
> For instance:-
> If price is £72,000 then dividing by 144 gives £500 which is 0.7% of
> £72,000.
> If price is £144,000 then dividing by 144 gives £1,000 which is 0.7% of
> £144,000.
> If price is £288,000 then dividing by 144 gives £2,000 which is 0.7% of
> £288,000.
>
> In other words, the percentage is **always** 0.7%...
> How could you possibly get any other value?
It wasn't a troll, honest - just had a heavy night last :-)
Irma
Inviato da X-Privat.Org - Registrazione gratuita http://www.x-privat.org/join.php
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