Continuing our RealT valuation
series, we now bring to you – Rent by Price ratio. In our post – “Valuation by Rental Prospects - Real Estate
Valuations” we discussed how an individual should take into
consideration the rental prospects while valuing a property. Today let’s
discuss whether or not a prospective rent enough?
Facing dilemma: Which property to select?
Many a times, we get confused
making choices between different assets. It becomes tough to select one from a
choice of 2-3 properties. In such confusions, the decision is generally made
based on only apparent features (aesthetics, size, location, ease of
transaction etc.). To provide a rationale to this dilemma, we bring to you the
concept of Rent by Price ratio (RP ratio).
Rent by Price Ratio (RP)
As is self-explanatory from its
name, RP ratio means:
This gives you a fraction which
can be used very effectively for evaluating more than one property together. To
state in simple words, this ratio gives you the percentage of initial price
that you can recover per annum by rental income.
How to make the choice?
Let’s take a scenario that you
have a choice to make from among the following options:
|
Property
|
Prospective
Rent
|
Price
|
RP
Ratio
|
|
Prop1
|
INR 25,000 pm
|
INR 7.5 million
|
4.00%
|
|
Prop2
|
INR 20,000 pm
|
INR 5.5 million
|
4.36%
|
Source:
Real Scenario of 2 properties in Hyderabad, India
As both the properties provide
awesome investment opportunities and are located opposite to each other, it
becomes increasingly difficult to make a choice among the 2.
But looking at the last column
(RP ratio) in the above table, it becomes very clear that Prop2 provides a
return of 4.36% against 4.00% of Prop1.
Hence it makes more sense to go
for Prop2, than for Prop1.
Dilemma Solved, Decision Simplified B-)
Closing Thoughts: We formulated the above concept and analysis
while facing a dilemma on making the choice on the above 2 properties only.
This RP ratio provided us a yardstick to go for Prop2 & we followed it; you
may not. It’s just indicative, not a sure shot approach to making decision.
------ Thanks for reading RealT
Horizon J ------
