Skip to main content

Buying Property To Let – Working Out The “Value” Price


Here I looked at how to get a rough idea of valuing property for own use. I had a doubt whether the oft cited thumb rules make sense or they have long lost their relevance. After making life a bit complex by bringing in host of numbers, I did realize that if you are buying for your use, and with the “popular” capital structure of 25% down payment and rest on "loan", the thumb rule of buying property at maximum 15times is mostly in sync.  Now we look at the rental scenario – you are buying property to rent out and make an income stream. Before we move on, to state it bluntly – I am biased towards “Not being a landlord”, ‘cause it’s too much work for the money to be made going by rental yield in Indian cities. But then, that’s my opinion and still no harm in checking what the numbers say. My opinion may also change!!!

That said, for rental property to be a “value buy”, my guess is the costing should be way less than self-occupied property. Why? For starters, when you occupy property yourself – it is at zero cost, while when you rent, cost element comes into play. GOI’s income tax department also let’s landlords deduct 30% from realized rent as costs, in addition to interest outgo. This good blog also mentions that cost of renting comes to around 31.4% plus financing cost. Looks like GOI’s cost estimation for renting out is mostly on the mark (for a change).

Want to keep it simple – mark down the maximum price you would pay for own use by at least 30% if you want to buy for letting / renting out. If you are ready to pay 17 times going gross rent for the property for own use, you should not pay more than 12 times when buying to let / rent.

Or we can go the detailed numbers way. This time, I tried a different methodology. If I want invest in a “buy to rent” property, my objective is to create a regular income stream. What better way than to compare the rental yield with risk free yield, post expenses and tax? With RBI Retail Direct portal in action, I can now buy a 30 year government bond which will give me “no effort” guaranteed half yearly payment in my bank account for 30 years. To make it a value buy as per my standards, the net annual rent from property after 5 years should match up to the net interest paid by risk free investment.

Going by above established standard, one should pay no more than 12.40 times annual rent for the property***. It’s another matter than in India context it will be very difficult to land with property valued as such.

One can argue that this approach does not take into account expected appreciation of property. My counter is:

-          Try my calculator uploaded in the blog buying property for own use. My guess is results will mostly be in line to above working, IF YOU ARE CONSERVATIVE in your property appreciation rate assumption. One can justify any price by projection high appreciation rates, so mind that

-          Until and unless one can really get a distressed deal, I don’t expect much appreciation from property for first 10 years. Decent rental income, growing as per inflation is one’s best bet

-          Even a 30 year government bond can appreciate if interest rates go down

         

Final word: A bit of qualitative parameter: if I do not have 50% of property value to put as down payment, I would steer clear of making such an investment. Going for a highly leveraged “risk” investment is simply not my way to go about. But then, each to their own.

***Check out the calculator here

Comments

Post a Comment

Popular posts from this blog

War And Equity Investments

Uncertain times are upon us. There is a shadow of war post killing of tourists in Pahalgam. So far, equity markets have not shown any signs of cracking up despite of high expectations of armed conflict with our wayward neighbour. Is it the calm before the storm as far as equity markets are concerned? It is anybody’s guess that if a protracted war does happen, economy will take a hit in near term, which in turn will impact our daily lives, including equity markets. When and how this will happen is again anybody’s guess. Should you take a relook at your equity investments in such a scenario? Nothing wrong in being a little conservative in such times. Here’s what I think can be considered:     -           Scenario I: You have designated INR 100 for equity investments and are fully invested. While you do have money in non equity investments, in case of equity market downturn, YOU WILL NOT PULL MONEY OUT OF SUCH INVESTMENTS AND DEP...
Post a Comment
Read more

Equity Investing – The Worst Case Scenario, 10 Year Horizon Basis

10 year CAGR for the period 1 April 2010 – 31 March 2020: 6.19%. Covid 19 made equity market tumble and we had to contend with a lowly equity market returns. We can safely say 10 years is long enough investment horizon. Investment return of this quantum will easily qualify as worst case scenario. And it was. If we consider only point to point figure. Here’s what unique to listed equity investing: it is NOT like buying property where you lock in “one” price at a point in time. Then why look at worst case (or even best or average case) on point to point basis? My opinion – to get an idea of real worst case scenario, looking at data on 3 year moving average basis makes better sense. Let’s see what numbers say. Point to point returns of 10 year period ending: -           31 March 2018:                          ...
Post a Comment
Read more

Asset Inventory & Investment Success

You don’t know how well your money is doing until you have a clear picture where all your money is. That is where the role of periodically working out asset inventory comes into play. While it may appear to be a chore initially (and it is), if one perseveres, the results may be the best guide a very successful financial situation. The best part – you don’t need any fancy apps or other tools to go about it. Simple excel sheet or even a diary if you prefer writing can do the job near perfectly. I am deliberately not putting up any sample asset inventory format. That is left to each individual. The format you go by can be a simple one, with just the asset type & associated number against it. Or an advanced one where you also plug in realistic expected return. Maybe even a super advanced one (if I can say that), where you adjust the weighted average portfolio returns with expected inflation to get an idea how well your investments are keeping up with purchasing power capacity. Wh...
Post a Comment
Read more