Forum Archive Index - May 2001

["Michael Gore" <michgore@paradise.net.nz>]

This is off topic so apologies in advance, but I’m sure someone in this forum has knowledge of investing in residential property and I could use some help. I’ve recently been reading "8 Secrets of Investment Success" by Martin Hawes, a book of interest to market investors although not solely about sharemarket investing. In this book, Mr. Hawes talks about valuing a residential property investment. His equation goes like this: Take the income from the property AFTER expenses (rates, insurance etc.), divide by the yield in percent you expect the property to return, multiply by one hundred and you have the property’s value. For example, if the rental is $20,000 and you expect a 9.5% yield, then 20,000 divided by 9.5 equals 2105 times 100 equals property’s value of $210,500. This equation is preceded in the book by a discussion about yields for property investment in which Mr. Hawes states that yields fluctuate a little but over time are pretty constant. He said yields might be as low as 8% for commercial property in Auckland but that the market might require a higher yield, say 11%, if the property were located in a place like Cricklewood (I think a fictional small town he made up for the purpose of an example). OK so far so good, all simple enough to understand, problem is my fiancée and I have been looking at homes lately and I have noticed that the houses we have looked at in Wellington, admittedly not very many yet, have come out at around 6-6.5% yield when I do the equation on the asking price. For example looked at a place in a Wellington suburb on the weekend asking price $150,000 recently renting $220 per week according to the agent, currently unoccupied. Frankly we were pushing it to believe it was renting at that much but even if it was, yearly rental would be $11,440 minus say $1,500 for rates, insurance, etc. (would be more than that surely) divide by yield of 9% times 100 equals a generous valuation of approx. $110,000. So I wonder what’s going on. Is it that yields are unusually low at present? Have we only looked at overpriced homes so far? Are they asking too much and we should put in a really cheeky offer? Is Mr. Hawes talking only about professional investors and are they a different animal from homebuyers, picking up only occasional real bargains? Questions, questions! Well once again sorry as this is off topic but if anyone can share some info with me, I would really appreciate it. Regards Michael

P.S. read your comments about property Hugh. Interesting and scary and made sense I must agree but when the wife-to-be has her heart set on owning her own home, well what to do?