A lot of investors simply rely on the price given to them by the agent or developer. But developers can overcharge, they over-design buildings in a bid to win awards and they are forced to overcharge for the buildings simply to break even.
Some savvier investors may base their investments on a search on one of the many
internet property portals to find the average prices for similar properties in the area.
The more experienced might also use sites like Zoopla to see how properties have been amended, re-listed, re-valued since their original posting.
However, these sites only give us the values that the vendors and the estate agents think that the property is worth. This isn’t reliable as the vendor clearly wants to
obtain the maximum price, a strategy supported by the agent who normally works
on a commission basis.
There is only one way for investors to ascertain a property’s value which is truly safe and that is to find a properties residual value. The residual value is based on the amount of net rental income it can generate – anything above 6% looks like a
For example, if a property brings in £6,000 rent per year after all costs have been
taken in to account, that £6,000, based on a 6% net yield would give the property a value of £100,000.
That £100,000 would be the Residual Value of the property and it should be the focus for every investor going in to a deal. But at the minute investors ignore the residual and rely purely on the capital growth of a property which is hopelessly optimistic considering the market place at the moment.
Despite the residual value of a property being £100,000. The investor may pay £125,000 believing that the value of the property will increase and they can sell it for
£150,000. But then if property prices start to fall slightly, he’s suddenly in
negative equity and then the only price someone would be willing to pay for the
property is the Residual Value and the investor will have lost £25,000.
The key to real successful and safe investment is how you derive the 6% net yield which you have used to establish the property’s residual value. By working out the 6% net yield using below market value rent it means that the investor will not have
to contend with tenants struggling to pay rent. As rent continues to rise, there will always be a demand for properties charging below market value rent.
First time buyers will be queuing round the block to save a £100 per month, yet the
investor is still left with a 6% net yield because they have bought the property
at residual value.
It also means that there will always be savvy investors looking to purchase a property at the residual value because they are not only purchasing a strong income stream, but they are purchasing a property at a price that will not be affected by market fluctuations or crashes.
If the property market was to fall again then the investors who have invested
in residual value will be protected from the fall in house prices and when
houses start to get repossessed and more people are forced in to the rental
market, then their yields will go up even though they are still charging below
In the end, everybody will be relying on residual property valuations. It’s inevitably in the future but there’s no reason why investors can’t take advantage of them now.
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The credit rating agency, Standard & Poor’s, believes that the European
macroeconomic crisis will not extend beyond 2012, which will result in a “significant recovery” of European real estate markets in 2013.
“Standard & Poor’s Ratings Services believes that the macroeconomic crisis may not extend beyond 2012. We still expect a new recession in Europe, although we believe it will be mild, with a gradual return to growth thanks to the growing demand from emerging countries, the strength of demand in developed countries and the restoration of investor confidence,” said the company.
According to El Economista, the baseline scenario of S & P considers there will be a flat growth of the economies of the eurozone as a whole, with growth of 0.5% in France and 0.6% in Germany, while in UK the gross domestic product (GDP) will grow by 0.5%.
Stable outlook for construction
“With respect to the housing market, we look forward to seeing the beginning of a significant recovery in 2013, which will improve macroeconomic conditions and reduce unemployment,” said the agency, which they hope “will boost consumer demand and the valuation of real estate.”
As economies start to recover now could be the time to invest in property!
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