I'm new to the VR scene and I'm wondering what numbers to run when looking at an area and a property -- something akin to P/E ratios for stocks. What should I look at for starters?
Thanks,
Wade
How to Run the Numbers?
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Paul Carmel
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I assume that there are some criteria that are commonly used to evaluate and compare candidate properties. I find such criteria in every other business in which I've been involved. I would think that the net rental income to property price ratio would be important. What else do you look at, from a purely numerical standpoint, when trying to decide which property to buy when there are many candidate properties? What criteria do you use when evaluating market areas?
To answer your question regarding the birds: yes, when I fully understand what I'm getting into, birds do usually appear. The truth is that usually they were there all along, you just have to learn how to see and hear them.
Thanks,
Wade
To answer your question regarding the birds: yes, when I fully understand what I'm getting into, birds do usually appear. The truth is that usually they were there all along, you just have to learn how to see and hear them.
Thanks,
Wade
-Wade
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marcus
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The question doesn't make sense. If you profess to know about p/e ratios then presumably you know about net return on investment and all the associated financial ratios. but if you do, then why ask the question?
Obviously you look at any business in terms of how much you're going to earn compared with how much it'll cost, will it earn more than money in the bank etc etc if financial return is what's important to you
Hate to tell you by the way but p/e ratios are a useless way of buying or valuing shares, its the quality of management, prospects and future potential that counts. Same with gites, same with pretty much all investments.
if you like somewhere and can make a go of it without destituting your family go for it, otherwise don't. simple.
(I've just watched fistful of dollars on the telly so I'm in a tough mood tonight)
Cheers
Marcus
Obviously you look at any business in terms of how much you're going to earn compared with how much it'll cost, will it earn more than money in the bank etc etc if financial return is what's important to you
Hate to tell you by the way but p/e ratios are a useless way of buying or valuing shares, its the quality of management, prospects and future potential that counts. Same with gites, same with pretty much all investments.
if you like somewhere and can make a go of it without destituting your family go for it, otherwise don't. simple.
(I've just watched fistful of dollars on the telly so I'm in a tough mood tonight)
Cheers
Marcus
I don't know all about these things, which is why I am asking the question. I don't look at any business in terms of how much I earn compared to how much it costs, but it is the aspect of it that I am trying to understand with regard to VR. I understand that there is much more to it than that and I'll get to asking those questions when I'm ready. I used P/E ratios only as an example to frame the question.
I am looking at this from much more than a purely financial viewpoint, but that is the part that I understand the least. I thought that this would be a good place to get answers, but it's beginning to look more like a good place to get abuse.
Thanks,
Wade
I am looking at this from much more than a purely financial viewpoint, but that is the part that I understand the least. I thought that this would be a good place to get answers, but it's beginning to look more like a good place to get abuse.
Thanks,
Wade
-Wade
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Normandy Cow
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Wade - please don't be put off. This forum is very friendly (much more so than another one which I regularly look at) and usually extremely useful - I am sure that you will find the answers to most of your questions.
But I think that the problem is that most people who rent out holiday properties do not do it purely for a healthy profit - if we did then we would probably have given up a long time ago!
In my case, my very scientific method of choosing a holiday home was the French "Coup de Foudre" method. I visited a number of properties, and was on the verge of giving up my search and investing my money in a loft conversion and new bathroom in my London house when I finally visited one which took my breath away and it was love at first sight and I just knew I had to have it.
If I had looked at P/E ratios and ROI etc, not to mention the enormous amount of time and effort involved in letting out a holiday home, then I would NEVER have bought it - but my gosh have I had a wonderful time over the past three years!
I suppose to answer your question, if there are a number of candidate properties - I would choose the one that would be most appealing to your target market, and the one that would look the most attractive in your advertising.
Good Luck with your search!
But I think that the problem is that most people who rent out holiday properties do not do it purely for a healthy profit - if we did then we would probably have given up a long time ago!
In my case, my very scientific method of choosing a holiday home was the French "Coup de Foudre" method. I visited a number of properties, and was on the verge of giving up my search and investing my money in a loft conversion and new bathroom in my London house when I finally visited one which took my breath away and it was love at first sight and I just knew I had to have it.
If I had looked at P/E ratios and ROI etc, not to mention the enormous amount of time and effort involved in letting out a holiday home, then I would NEVER have bought it - but my gosh have I had a wonderful time over the past three years!
I suppose to answer your question, if there are a number of candidate properties - I would choose the one that would be most appealing to your target market, and the one that would look the most attractive in your advertising.
Good Luck with your search!
Wade,
Greetings from New York. Not sure how much use this will be but the principles must be the same all over the world!
When a real estate agent values a property for sale they do what's called a "Comparative Market Analysis". There are three basic methods that are then reconciled:
1. Recent sales of similar properties
2. Cost to rebuild the property
3. Rental income it could generate
You are interested in number 3 and the formula is known as IRV, which is Income divided by Rate equals value. Put another way, if you think you could rent a house for $10,000 a year and you want a 10% return on your investment, then divide 10,000 by 10% and you get 100,000. That's what the house is worth to you.
Greetings from New York. Not sure how much use this will be but the principles must be the same all over the world!
When a real estate agent values a property for sale they do what's called a "Comparative Market Analysis". There are three basic methods that are then reconciled:
1. Recent sales of similar properties
2. Cost to rebuild the property
3. Rental income it could generate
You are interested in number 3 and the formula is known as IRV, which is Income divided by Rate equals value. Put another way, if you think you could rent a house for $10,000 a year and you want a 10% return on your investment, then divide 10,000 by 10% and you get 100,000. That's what the house is worth to you.
Waves from America
Hi Wade,
I think net rental income compared to the price of the property is the only useful equation to look at. If you are buying a condo in the States you are likely to get much more accurate figures than if buying a house in Europe, as rental income is pretty uniform in a given development.
I think it is fair to say that most people here don't own rental properties purely as an investment vehicle, but because they have an emotional attachment to a particular property or location. So the idea of running numbers is alien to most Lay My Hatters.
There are books you can order online that deal with the financial side of things from a US perspective. Or Christine Karpinski's book - can't remember the title, but it includes the phrase 'vacation rentals' - I think that talks about this too.
I think net rental income compared to the price of the property is the only useful equation to look at. If you are buying a condo in the States you are likely to get much more accurate figures than if buying a house in Europe, as rental income is pretty uniform in a given development.
I think it is fair to say that most people here don't own rental properties purely as an investment vehicle, but because they have an emotional attachment to a particular property or location. So the idea of running numbers is alien to most Lay My Hatters.
There are books you can order online that deal with the financial side of things from a US perspective. Or Christine Karpinski's book - can't remember the title, but it includes the phrase 'vacation rentals' - I think that talks about this too.
Paolo
Lay My Hat
Lay My Hat
Another example:
You have $100,000 to spend on a house and find one that you love for $75,000, but it need $25,000 spending on it. You also know that you could get $1,000 per month in rent, but only for 8 months of the year. That's an 8% return of your investment.
Formula:
Income = 1,000 x 8 =8,000
Value = 75,000 + 25,000 = 100,000
Rate = Income divided by value = 8,000/100,000=0.08
P.S. As Paolo says, there are lots of other reasons apart from money for buying a property. If yours is one of them, then a general rule of thumb would be to never buy anything that you would not mind living in yourself as a permanent home if life takes an unexpected turn.
The formula above uses gross rental income, not net. You only use net for the net operating budget etc.
You have $100,000 to spend on a house and find one that you love for $75,000, but it need $25,000 spending on it. You also know that you could get $1,000 per month in rent, but only for 8 months of the year. That's an 8% return of your investment.
Formula:
Income = 1,000 x 8 =8,000
Value = 75,000 + 25,000 = 100,000
Rate = Income divided by value = 8,000/100,000=0.08
P.S. As Paolo says, there are lots of other reasons apart from money for buying a property. If yours is one of them, then a general rule of thumb would be to never buy anything that you would not mind living in yourself as a permanent home if life takes an unexpected turn.
The formula above uses gross rental income, not net. You only use net for the net operating budget etc.
Waves from America
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Alan Knighting
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- Location: Monflanquin, Lot-et-Garonne, France
Wade,
Please don’t thing this Forum is a place where you are going to get abuse. I am one of the most prolific posters on the Forum and I have never once been abused. Others have disagreed with me, some have a fundamentally different view of things, I have had my leg pulled, I’ve had my feathers ruffled, I have said things which have been proved wrong but, have I ever felt abused? Not ever - never!
Now, coming to what I think was your original question; was it to do with return on capital? When Joan and I moved to France we had a certain amount of spare capital which we would normally have invested for income purposes. At the same time, we wanted to have an interest and something “to do�; self-catering properties seemed to offer an attractive alternative. After a long and arduous search we found what we looking for and bought our house and a small running business. We thought that the business had a lot of potential and so it proved – we have been able to achieve a net annual return on our investment of around 20 to 25%.
We know we are far from being typical but there it is for what it’s worth. We are not at all complacent, we work hard at it each year but our financial results go a long way towards explaining why we don’t have a personal web site and why we don’t get too exited about things like Google rankings.
In my opinion, you will get far more from this Forum than you will ever put in so - stay with it.
Alan
Please don’t thing this Forum is a place where you are going to get abuse. I am one of the most prolific posters on the Forum and I have never once been abused. Others have disagreed with me, some have a fundamentally different view of things, I have had my leg pulled, I’ve had my feathers ruffled, I have said things which have been proved wrong but, have I ever felt abused? Not ever - never!
Now, coming to what I think was your original question; was it to do with return on capital? When Joan and I moved to France we had a certain amount of spare capital which we would normally have invested for income purposes. At the same time, we wanted to have an interest and something “to do�; self-catering properties seemed to offer an attractive alternative. After a long and arduous search we found what we looking for and bought our house and a small running business. We thought that the business had a lot of potential and so it proved – we have been able to achieve a net annual return on our investment of around 20 to 25%.
We know we are far from being typical but there it is for what it’s worth. We are not at all complacent, we work hard at it each year but our financial results go a long way towards explaining why we don’t have a personal web site and why we don’t get too exited about things like Google rankings.
In my opinion, you will get far more from this Forum than you will ever put in so - stay with it.
Alan
I think my cottage probably comes under the "emotional attachment" label and I named it after my late mother which will make it almost impossible to part with.
We break even with it, the rentals pay off the mortgage but it does allow us to use it when not rented out and have a bolt hole in the country. At the end of the day we have two properties with one smallish mortage and some security for our retirement. That was our aim but I realise others have a different game plan. Good Luck!!
I'm the last person to abuse anyone, honest!
If there is any "feather ruffling" going on I just stay right out of it as I'm a big soft coward. Unless it is about something very important and dear to my heart like the towels thread. 
We break even with it, the rentals pay off the mortgage but it does allow us to use it when not rented out and have a bolt hole in the country. At the end of the day we have two properties with one smallish mortage and some security for our retirement. That was our aim but I realise others have a different game plan. Good Luck!!
I'm the last person to abuse anyone, honest!
If there is any "feather ruffling" going on I just stay right out of it as I'm a big soft coward. Unless it is about something very important and dear to my heart like the towels thread. -
Alan Knighting
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- Location: Monflanquin, Lot-et-Garonne, France
Sue,
Fluffie know what you mean and his towels definitely have their feather ruffled.
As someone who played a large role in ensuring that Belford Hall did not become a "controlled ruin" the village has a special place in my memories. BTW my mother's first name was Lillian, Lily to those who knew her well.
Alan, (Fluffy to those on the Forum who know me well).
Fluffie know what you mean and his towels definitely have their feather ruffled.
As someone who played a large role in ensuring that Belford Hall did not become a "controlled ruin" the village has a special place in my memories. BTW my mother's first name was Lillian, Lily to those who knew her well.
Alan, (Fluffy to those on the Forum who know me well).
Thank you all for a warm welcome. I certainly do understand the emotional aspect of this and it wouldn't make any sense for me to come to this forum asking others what would stir me emotionally; I already well understand that aspect of it. In some ways it scares me, because I don't want to run out and do something dumb. So, I have to temper that some with cold, hard numbers -- a sanity check, if you will. Thanks for the responses on IRV and such. That was the sort of thing that I was looking for. I found a couple of books (Karpinski's Profit From Your Vacation Home Dream and Thomsett's The Real Estate Investor's Pocket Calculator) tonight. I'll let you know if they are any good.
Thanks again,
Wade
Thanks again,
Wade