Showing posts with label price by rent ratio. rent by price ratio. rental valuations. Show all posts
Showing posts with label price by rent ratio. rent by price ratio. rental valuations. Show all posts

Rent by Price Ratio: Real Estate Valuation by Rent

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:

Prospective Rent
RP Ratio
INR 25,000 pm
INR 7.5 million
INR 20,000 pm
INR 5.5 million

                                                         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 ------

Related Posts Plugin for WordPress, Blogger...