Learn how to quickly calculate the value of a tenanted property.
Now that you understand the concept of a yield and how it’s applied, let’s use it to determine the value of a property, based on its income.
When buying a property with an income, the value of that income in relation to what you will pay (yield), is very important.
Often sellers simply pull an asking price out of thin air, and so you must be able to determine whether a property is, in fact, worth the asking price.
Luckily, this is quite straightforward. Simple maths:
First, you’ll need to understand the minimum yield the open market will pay for the asset in question.
Second, you’ll need to know the net income the property is achieving.
Let’s say it’s a newly built, well-managed building with a blue chip tenant on a 5-year lease.
Because of the low perceived risk, the open market is prepared to pay a premium number of 8% for the property. You’ll know this if you’ve done your research.
The total net annual income is R526,000.
The formula: Annualised net income, divided by the yield = property value
(R526,000 / 0,08) = R6,575,000
Well done. You’ve just correctly valued an income generating asset.
Tip: Although strictly speaking, you should only use the income-based valuation method on a property with income, you can use this method to cross check the valuation of a vacant property.
Remember, when buying vacant, your risk is higher, therefore your yield should be higher.
Keep an eye out for more on valuation methods.
For assistance with market valuations and professional property services, contact Kat.