I am trying to work out what a property may be worth in the future based on future rents and interest rates.
Assumptions
Middle ring suburb in Melbourne
Properties in this area usually sell at a yield below current interest rates eg. 2% below var rate.
It’s a 2 bed unit near beach, transport, schools, parks etc.1997 – Bought $95,000 Rent = $145 per week. Var int rate = 10.5%
(145*52)/95,000 = 8%
2004 – Now
Worth $260,000. Rent = $205 per week. Var int rate = 7.07%
(205*52)/260,000 = 4% We are in a property boom, hence the low yield.
2008 – future. What can we predict the future value to be based on rents and interest rates? Can it be done?
Let me have a go!
Var int rate rises to 9.09% Rent to increase to say $250 per week as interest rates rise.
Lets assume yield on property would be 7%.(250*52)/X = 7%
Therefore X = $185,000
That’s a 30% fall in property value!!!!!!!!
Comments – Any thoughts on this. Anyone got anything on technical analysis in valuing residential properties?
Hi Yack,
i have a book on technical analysis, read it and all, but really its too hard to tell, with how the market changes and all, best just to play with IRRs, sounds your pretty spot on with the technical analysis, only catch is, best to use your knowledge on futures (option), you seem to have a really good understanding of this.
apart from caculating the technical analysis, i would also work out and play with the equilbrum for the future demands of this property.
Cheers,
sisYack,
Too complicated for me, I never border with those kinds number.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]Hi Yack..
Isn’t this fundamental analysis? I’ve followed many heated threads on aus.invest forum on this. You are working out the future value of an by projecting growth and cashflows. Basically a valua investors method..
I do stocks this way.. never thought of doing it with property before..
To be TA, you would be looking at the charts and finding patterns?
Or is my definition too rigid?
EZ-Rent. The free tax and cashflow simulator for Australian property investors.
http://www.ez-rent.comHi Yack,
if you got sometime, or if you already have a property program software, see if has and if it can work out the IRR instead, this instead will give a much more accurate detail, also doing it this way, you can caculate future values over longer periods much quicker.
Cheers,
sisYack,
I would think your formula would also need to have a measure for size….
Sqm (for unit/flat/apartment) or land size (for house and internal sqm)
One property with the same house (sqm) might rent for the same amount, but if one has 50% greater land size, it would be worth more. (That wouldn’t be reflected in the rent though)
James
Hi Sis
I put IRR into ez-rent 1.2 then took it out again for version 2. The reason was that multiple properties affect your income and to work out your cashflows accurately you need your deductions. Add a neg geared property to your portfolio with a lot of depreciation and suddenly you drop a tax bracket for example..Then your IRR for a single property can change because your tax gain/loss changes.
I played with this for a while and then gave up on it as by brain started aching.. It may be that I am completely wrong on my IRR understanding – not being an accountant.
Then a knoweledgeable friend of mine suggested that IRR is of little use for property anyhow.
But it may be of benefit for someone to give a nice example of a 5 year IRR so that forum readers can understand its value..
Quote:Originally posted by Still in School:Hi Yack,
if you got sometime, or if you already have a property program software, see if has and if it can work out the IRR instead, this instead will give a much more accurate detail, also doing it this way, you can caculate future values over longer periods much quicker.
Cheers,
sisEZ-Rent. The free tax and cashflow simulator for Australian property investors.
http://www.ez-rent.comCan someone explain the IRR – I assume its the internal rate of return.
I failed business finance at uni a couple of times and as an accountant, even I dont understand it nor its relevance.
Any comments appreciated. Otherwise I’ll get off my butt and do some research.
Originally posted by Chan$:Yack,
Too complicated for me, I never border with those kinds number.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]See too
Julain [worried]
THERE IS ALWAYS A BETTER WAY!
Hi Guys,
your right on what IRR stands for (internal rate of return)
most people, probably never play with IRR or even know what it is. what the IRR allows you to do is, caculate and accurately predict, future capital growth and gain of a property, the future LVR of the property and its net asset value.
the IRR also allows to see, what the effect of repayments or balance will be in a few years time, or even the rise or fall of interest rates and its effect on the loan debt repayment and the net asset value of the property or just the asset value as a whole.
There are other ways to caculate and look at property, by looking at yeilds and cash on cash returns, but for real accurate and up to the minute in any market, either it be in any time or any place in the world or where ever and when ever, the IRR is the most accurate.
Cheers,
sisBefore getting into IRR you need to understand present value and net present value.
I’ll offer this example..
If I give you $1000 now and it earns 5% interest annually, the present value (now) is $1000 and the future value in a year time is $1050.
Now if I gave you that same $1000 in a years time, the future value is $1000. What is the present value? Well it can be looked at this way..
Given that we managed to earn $50 in a year at 5%, we have missed that opportunity when getting the $1000 a year later. So we are now asking, what amount (x) will equal $1000 when 5% is added to it? The answer is around $952.50ish. Basically is we add 5% to this amount we come out at $1000.
Therefore the present value of the $1000 now is $952.50
http://www.investopedia.com/terms/p/presentvalue.asp
This method helps to factor in the time value of money. You can use it to take into account inflation on a fixed amount.
I once read a great one day cricket analogy. If we assume score value of 330, where the innings started slowly and then the run rate increased, once we define that increase run-rate as a percentage, so we can then use it determine the present value of the score at over 10, 20, wherever..
Now Net Present Value (NPV – http://www.investopedia.com/terms/n/npv.asp) is harder to explain..
I’ll try and find a good website and then post an easy example. The important thing is that IRR is determining when the NPV is close or equal to 0.
EZ-Rent. The free tax and cashflow simulator for Australian property investors.
http://www.ez-rent.comHi Ez-rent,
your right, but also another thing i realise i forgot to add was that, with the IRR it can also take in account CPI increases and different rates of inflation, with this information, a property that may look positive, even if it provides cashflow, can still be negative or its future value is actually runing at a loss.
… but what Ez-rent has pointed out is very important and must be understood, when determining the IRR on a property whether it remains positive or negative on future values.
Cheers,
sisThats where discount cash flows come in (oh god another term!!)
Basically we have to determine a discount rate so we can do our present value/future value/npv calculations. What should this rate be? Many people say ‘inflation’, as this is factor that erodes the value of money.
But its not that simple. For example – if you can put your money in a cash management trust that earns 5.5% guaranteed, then your property (or share) investment needs to be able to return better than 5.5% yeah? (forget tax and other factors for a second – lets try and keep it simple)
Therefore you should discount by the amount that you feel you need to get out of the investment. Eg if you want a 10% return, then discount by 10%. If the investment is ‘risky’, then discount it even further to account for that risk. ie ‘this is risky, I’d want a 20% return on account of the high risk’, so discount by 20%.
When I find a good Net Present Value example I can then show how this derived discount rate can help you determine if an investment is bad or less bad
EZ-Rent. The free tax and cashflow simulator for Australian property investors.
http://www.ez-rent.comHi Ez-rent and Guys,
ill shoot an example, this is a basic example of an IRR over 5 years.
eg.
lets say you purchase a property for $200k today with a 20% cash deposit.
LVR
$40k cash deposit, $160k mortgage loan.lets also presume, the net after tax flow is $2500 a year and is the same for the next 5 years.
5 years later past….
the actual mortgage debt is now reduced down, due to many and plenty repayments but, we are not concerned of how much debt is owing.
What we are concern about is our IRR.
and that we are also going to presume over these 5 years that the propery is now valued at $360k
For our orginal down payment of $40k our net after tax flow is $2500 a year plus a further more refinance lifted back up to New Assets LVR Value. Presuming by this time it is still 20%.
We have made $2500 consecutive for 5 years plus a further more of $288k, in total, we have a nice whooping $300,500k cash out to throw around or to invest.
This is why its very important for the aggressive and assertive investors to understand IRR, when further creating/controlling and further increasing their wealth.
Cheers,
sisps. this is only a basic example
thats werid….
why is my post split up… [blink]
Cheers,
sisHeh, I thought that was quite clever cos it split on the “5 year past” bit..
But that wasn’t intentional?
EZ-Rent. The free tax and cashflow simulator for Australian property investors.
http://www.ez-rent.comHi Ez-rent,
dont know what happen, wasnt intentional, but it did finish and start off nicely…
Cheers,
sisIRR is just fancy edu-speak for ‘yield’, I just looked it up…
Hi Mini,
it maybe another fancy word, but its the only caculating method that can take in any time or value of a property either it be in the past or future and still predict accurately what the value will be even, with the cpi and inflation factored in…
… but it is definietly useful
Cheers,
sis
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