Comments on: House Value = 15 x Ann. Rent

By: Geotpf

Geotpf — Mon, 28 Sep 2009 20:43:11 +0000

Hmmm. My house in Riverside cost $150,000. I believe I could rent it out for $1,500 a month, so the purchase price was only 8 1/3 times annual rent.

But then go to a place like Irvine, and the math is reversed-a house that costs a million bucks might rent for $2,750 a month, for a purchase price of 30 times annual rent.

That is, this is way too simplistic.

By: fallbrookian

fallbrookian — Mon, 28 Sep 2009 03:11:05 +0000

I just bought a house for $190,000 in Fallbrook and am renting it out for $1175 a month. So the 15X is pretty much right on.

By: UCGal

UCGal — Mon, 28 Sep 2009 03:03:28 +0000

I’ll add my real world example… I recently refi’d so I have that appraisal. I also know what comparable rents are because houses in my ‘hood are for rent. It’s a bit of an unusal property because we have a very nice granny flat – but I’ have a good idea of what that would rent for also…

The formula comes in about $10k higher than the appraisal we got a few months ago. (The appraisal seemed low… but not unreasonable. It was very hard to value the companion unit because there is nothing similar in our area.)

FWIW – since I live in an older hood – University City – no mello roos, no HOAs.

The math works if you’re not dreaming an asking price.

That said – high end homes tend to rent for less than the sale price would warrant… A friend has an ocean view house in Del Mar that he rents for 3k/month… It’s definitely worth more than a million – so that case the rent/own math works in favor of the renter.

By: Jeff

Jeff — Mon, 28 Sep 2009 02:52:10 +0000

15x rent seems to be an oversimplification. It completely ignores interest rates. Did the 15x rules still hold 18 months ago when 30-year fixed rates were 125bps higher (even more on jumbos)? Will it still hold if and when interest go up to 7%, 8%?

It seems like a better metric would be PITI/rent. Using this method, I would guess fair value would be at around 1.2, maybe 1.3 (always greater than 1.0 so long as the mortgage interest tax deduction is with us).

I realize PITI doesn’t take into account maintenance costs… But I figure this is offset by the value placed on home ownership in our society (which is still VERY high, even post-crash).

What do you all feel is good target for PITI/rent?

By: Anonymous Coward

Anonymous Coward — Sun, 27 Sep 2009 18:30:40 +0000

15x net cash flow is a number that I would accept as reasonable on a financial basis in a stable market and economy. Anything higher is driven by the assumption that there will be growth in the net cash flow, or possibly by non-economic factors. The same reasoning applies as to dividend paying stocks, or bonds. As in investment, rental properties need to produce a return competitive to other investments with similar risk.

The buildings that I have an interest in were all purchased before (some long before) the last boom for 8x to 11x scheduled rent and rehabed. Rents and valuations are higher now, but not by much after adjusting for inflation. Of course, none of my stuff is on the high end of the market where prices are high and returns are low.

If buying a house to live in, the price is whatever it takes. I believe that ‘what it takes’ is too high and falling, so I’m a renter.

By: Max Rockbin

Max Rockbin — Sun, 27 Sep 2009 16:41:27 +0000

I lease some houses in Portland, OR and I keep a close eye on houses for sale as well. The formula is off here by a considerable amount. I reckon 20x would be a better estimate in the neighborhood I work in. Of course, Portland didn’t have the bubble San Diego had (about half the increase, I think), and the upscale neighborhoods didn’t drop more than 10% or so, so that makes a difference.
Another huge factor: RENTS. Areas with mostly single family homes, and not much multifamily tend to get much higher rents. It’s supply and demand. There’s an apartment glut in my city.

SO… once again, Real Estate is local. Generalizations with ratios rarely mean much.
One house I have rented is probably close to a 23x annual rent ratio.

Go to Craigslist and compare house rents to the price of the same house on Zillow (just for a very crude measure), and you’ll see 15x isn’t close in many many cities.

By: François Caron

François Caron — Sun, 27 Sep 2009 16:26:55 +0000

Surprisingly, that 15x formula works for my current rental in Montreal. I’ll have to remember that when I go shopping for a new place next year.

To buy or not to buy? That is the question.

By: W.C. Varones

W.C. Varones — Sun, 27 Sep 2009 14:34:55 +0000

I’m an OD (Original Doomer), and still renting even though I’m older than time itself.

But I think we really need to consider the possibility that we’re wrong, and we could go the way of Zimbabwe rather than Japan. Zimbabwe Ben is printing like a mofo, and it’s at least possible that he prints enough to create inflation even in a Depression.

If Zimbabwe Ben gets his way, 30-year fixed at 5% is going to be the best bet ever at any price.

By: Rob Dawg

Rob Dawg — Sun, 27 Sep 2009 14:06:02 +0000

Sold my last April 2006 for 23x. Currently good for probably 16x for whatever sucker bought it the second time since then. No thanks. It isn’t good areas, it is the Cold Equations and while gross multiples are simplifications I still know I’m not interested in this market until they get under 12x before i even bring out my pencil. California used to command a premium because of a relative certainty in future expenses in comparison to other places. you knew what the taxes were going to be, utility and maintenance costs were small compared to other areas, demand (vacancy factors) were favorable, etc. Sorry to say those are more questionable for California not less due to the now permanent state of fiscal crisis at all levels of misgovernance.

By: there is no housing bubble

there is no housing bubble — Sun, 27 Sep 2009 14:01:19 +0000

Since the govt cant seem to create any jobs here all we can do is artificially increase asset prices.Houses for all so people can get free money to buy new cars and flat screens.