… and a big welcome to you too. Good to see a new member "jumping right in the deep end and posting"
I believe that in the Commercial Investment arena that is exactly how one determines value – all based on yield. But hey, that also might fall over in a similar way to Shape's comment re "location" – I don't know. The comment re Commercial was "something I read" and I noted at the time that it was quite different to Residential Investment in that way.
With residential, location is a huge factor and each house has its own "features" that make it different from the one next door. As such, I guess your next move should be to endeavour to gauge (from the RE agent – or more than one agent) the expected "market value" of this place. Once you know that, you can calculate the yield (or use Steve's way, and set the yield you want, which would then dictate the price you would pay). Of course, in that instance, you may need to find an area that will provide such a yield, or find a bargain that allows it – but in the latter case, watch out for "Why would no-one else buy it?" All part of due diligence.
Do you have a particular yield in mind? Oh, and "As much as possible" is a FAIL mark – sorry !! It all depends on what you are seeking – can you renovate? Are you looking to subdivide? Develop? Are there other ways you can add value to a place to increase its yield, even if it didn't quite meet your initial benchmark? Change its use – e,g, go from family rental to student accommodation, shared housing, etc.
Meanwhile, keep on reading (and searching) as there might already be threads on here that can provide you with answers.
Benny
PS Oh, and just a hint here:-
Quote:
The property is on a single title, but is comprised of two independent units.
That would tell me that the units should sell for LESS than equivalent strata titled units – maybe even a lot less. Keep in mind, that the seller has a much more limited market with such a sale. They can sell to investors (primarily) or perhaps a family that wants to provide an extra unit for grandma/pa, aunt/uncle, etc – or a "Home and Income" for someone wanting a bit more than just a home. So the numbers of potential buyers drops markedly – this should work in YOUR favour. Just don't let an RE agent mislead you by comparing their value with other (strata titled) units..
Hi Benny!
thanks not only for your detailed response, but also for the friendly welcome. I love that people are responding to my ill defined rookie queries!
I follow what you mean about commercial vs residential values.
Still, without going into all the ins & outs here, I am a bit puzzled. There is a discussion of a possible price tag of 300 – 320k. Which would give it a yield of (where's my calculator?) let's say, over 8%. This leaves us to think it has been under valued or we are missing something obvious!
It is a small fairly non descript suburb that we are very familiar with. It is largely residential with few units or flats. It is close to a less desirable suburb with bit of a reputation. The property itself over looks Crown land which is largely a wetlands reserve. Close to CBD, has nearby schools & public transport access.
Gauging the market value is a tough one: neighbouring properties (all single dwellings) sell around the 300k mark & are rented for around $280 pw. So, we wonder if the single title issue could reduce its value THAT much? That is a difference of over 12k annually in rental returns.
Okay, so it is an unusual property: it started life as a single dwelling that was extended and then divided, hence the separate units (individual meters etc) on the one title. It is recognised by the local council and lands dept as having two dwellings on site, but I do take your point about this versus 2 strata title units. Thing is, the purchase of 2 x strata units locally (in that neighbouring down market suburb with a reputation) would be almost twice the purchase for half the rental return. Does its status as an unusual property matter that much if it appeals to renters and remains well maintained and attractive to renters?
in regards to possible improvements: not sure any would be useful… Converting it into one very large single dwelling would seem counter-productive. There is room to further develop the block, but doubt that would get council approval at this stage, plus it would diminish the appeal of the existing units. One unit could be adapted to include an extra bedroom/study that might improve the rental return a bit, but with recent renos it looks only the usual maintenance and improvements to a property of its age should be necessary for the foreseeable future at least.
now I am discussing far much more than I intended to…. And boring peeps in the process…..but it looks like the short answer is there is no easy formula to estimate market value and we are back we we started…. Without a clue about this IP business!!! Lol!
The equation does exist, but really need to look at other factors as well….as standard it may sound – it does depend on the area your investing.
Ie for example: A older style 2 bedroom unit in Westmead ( Sydney) rents for $400pw — it would sell for average $450,000 — the gross return is 5.2%
( years rent/ purchase price )
Now lets say we took a drive 20 min away Westmead and we used this same equation ( but in reversed) say for a unit in Macquarie Park ( Sydney) –
A 2 bedroom unit in Macquarie Park ( around 20km away or 20 min drive away from Westmead) ) rents for $430pw — the purchase price to receive 5.2% return would make the property be "worth" $430,000…. impossible ~ older 2 bedroom units in Macquarie Park sells for on average $530,000.
Now lets do the reverse and go 23km out the other direction ( also 20 min drive from Westmead) and go west to St Marys.
A older style 2 bedroom unit in St Marys ( Sydney) rents for $280 pw — the purchase price to receive 5.2% return would make the property be "worth" $280,000…. however you can pick up older style units in St Marys for around $250,000.
^^ Above are just some examples….
So really some areas and some property type you an use some sort of equation…So yes numbers and "rental return is very important" but it doesn't always determine the property value.
Hope that wasn't to confusing lol..
Lol! No that all makes sense! I think!
If I told you preliminary discussions are that the property will be on the market for 300k – 320k would it seem like we have stumbled on a bargain or something to be wary of? The suburb is a bit more 'up market' than St Marys. It is a small suburb, largely residential with few units or flats. It is close to a less desirable suburb with bit of a reputation. The property itself over looks Crown land which is largely a wetlands reserve. Close to CBD, has nearby schools & public transport access.
"fair purchase price" doesn't always go by rental return/yield, only works for certain areas and property type.
There's a lot more to "fair purchase price" than JUST the rental return..
What are you actually looking for ?? a number/purchase price where you can break even with your rent??
Thanks Michael:
Perhaps ignore my use of 'fair'.
What I suppose I was looking for was some type of equation to work backwards from the rental gross to give me some indication of the likely purchase price. But I think you are telling me such a thing is impossible without taking into account other factors.