Record real estate growth, record real estate prices – these are just some of the headlines that attract the attention of property owners and potential sellers and create in them, perhaps, unrealistic ideas about how much their property is worth, writes money.bg.
In general, the price of real estate is the price at which you can sell it. And depending on supply and demand, it can approach one of its two limits – the maximum possible (from the point of view of the buyer) and the minimum acceptable (from the point of view of the seller).
It is because of the high demand for real estate, in a pandemic and record savings of the population, which is afraid of inflation, long-frozen real estate transactions, bought at record high prices during the peak of the housing market in 2008, entered the market and sold.
This is happening at a time when real estate prices are beginning to approach their “maximum peak” (at least from the current point of view).
But property owners should not deceive themselves. Their property costs as much as buyers are willing or able to afford to pay.
And despite the enthusiasm of the latter, prices have a natural limit, which is determined by factors such as affordability and profitability of rent, as well as the situation in the mortgage market and the level of interest rates.
It is with the profitability of the lease can be largely associated with real estate prices, at least from an investment point of view. Rental profitability underlies the demand for real estate by people with savings, whose owners have decided to “thaw” in search of higher profitability or protection against inflation.
After all, if the increase in capital (which will be obtained from increasing the value of real estate purchased for investment purposes) is uncertain and unknown, the return on rent is much clearer and is the only “reliable factor” on which to base an investment decision to purchase real estate.
So, the first and easiest way (at least in the opinion of the author), by which you can estimate how much your property is worth. Historically, rental yields in this country have ranged between 3 and 6% (depending on the type of property and its location), and real estate prices and rents have almost always moved in unison.
In other words, when the market is “hot” and close to its peak, these returns fall to the lower limit, and conversely, when the market is at the bottom, they are usually closer to the upper limit.
The truth is that it is unlikely that anyone will invest (in order to make a profit and protect their savings) in real estate with an expected rental return below 3%. Because it will not protect his savings even from inflation (if he does not expect capital gains).
On the other hand, if profitability rises to the upper limit of 6%, then at record low rates on deposits and record deposits, the market must eventually correct this skew and as real estate prices rise naturally reduce this rate.
Following the average point of view, the author uses the simplest empirical rule to quickly determine (without claiming accuracy or taking into account specific factors related to real estate, such as location, size, quality of construction, etc.) how much the property should cost.
And as a rate, I use 5% of the annual rental yield, which should at least protect the investor’s savings from inflation and give a small increase in capital over time, and for large real estate, this rate can drop to 4%.
Simply put, real estate (according to the simplest estimates of the author) should cost about 20-25 times more than the potential annual rent it can bring.
This is 20 times more than the sub-15-year rent recommended by experts to property buyers as a limit when buying a property is more financially important than renting. But on the other hand, this figure reflects the position of the seller, who always has an overestimation of their real estate, as well as the current situation of the “seller’s market” in our country.
For example, if it is rented for 10,000 hryvnias (a two-room apartment in an ordinary district of Sofia), then the annual rent is 120,000 hryvnias (12×10,000 hryvnias). Multiplied by 20 times – this gives an estimate of 2,400,000 hryvnias.
An apartment that brings UAH 20,000. monthly rent and UAH 240,000. annual rent, should cost according to the above criteria about 4,800,000 UAH, when using a 20-fold ratio, or up to 6,000,000 UAH, when using a 25-fold ratio, because, most likely (judging by the higher rent ), is a larger property, or located in a “more desirable” area.
Of course, the above method of real estate valuation is completely unconvincing. On the other hand, the specified multiplier (in this case, 20 or 25-year rent) can vary upwards – for example, up to 30 (for very strong sellers), or downwards – up to 15 (for strong buyers), depending on from the location and size of the property, its personal characteristics, market situation, etc.