In my last article we did analyse different methods to valuate a property in Spain approved by banks and professionals of the construction industry.
In this article we will see a relatively simple method that can provide you with a pretty accurate assessment of the price of a property which could be for selling or buying as its price for renting in case the property is to be let.
The key is called: PER
Sales and rent prices always keep relationships that vary in time but can be calculated:
A) Gross return per rental
It is the percentage resulting from dividing the annual money we get for a rental home between its selling prices. So, for example, a house that is rented for 12,000 euros a year (1,000 euros / month) and worth 240,000 euros is said to offer a gross profit of 5% according to this formula:
(12,000 / 240,000) × 100 = 5%
B) The PER
If we do the reverse operation of dividing the sale price between the rental prices, we will get what is usually called PER (Price Earnings Ratio). This figure is equivalent to the number of times the rental price is contained in the sale price or the number of years it would take to pay the price of a house by rent under the current conditions. It is a universally accepted ratio for valuing assets such as companies, housing, etc.
The PER of the previous dwelling would be 20 times and the calculation through which it has been reached would be:
(240,000 / 12,000) = 20 times
According to the above data, if we had two of the three previous figures (sale price, rental price or PER), we could calculate the third. As we have the data of the gross profitability per rent of all Spain offered by the Bank of Spain (BdE) and updated quarterly, we only need to know a reliable rental or sale data in order to calculate an approximation of the other variable. We can obtain this important figure by searching in Internet any let prices of similar properties to ours. If there were differences we will adjust up or down.
Bank of Spain figures.
According to the latest report by the Bank of Spain (BdE), the gross profitability of renting a home in Spain at the end of the first quarter of 2017 is 4.3%. This is equivalent to saying that the PER is 23.2 years or 279 months.
In short, if we are sure that a house identical or very similar to the one that interests us is rented for a certain price, currently it would be enough to multiply the monthly rental price by 279 months to obtain a suitable approximate sale price. For example, if you rent for 1,500 euros per month and multiply that monthly rental price by 279 months we would get the selling price should be around 418,500 euros under the current conditions.
Similarly, if we have a house that could be sold for 260,000 euros, it would be enough to divide between 279 to know that its rental price should be about 930 euros per month.
We insist that it is important to know that the PER or the dividend yield varies over time, so we would have to update the calculation of this data to optimize the calculations. In times of very high real estate prices, the PER was very high, while now it is more moderate, although it has begun to rise.
Adjustments for each house
The above calculation serves as an approximation for sales and rental prices; however, it should be fine-tuned because not all markets or all houses are the same. As general rules we have that the PER can vary by:
The provinces with the highest demand tend to have a higher PER than those with lower demand. Thus, it contrasts that in Spain the PER of San Sebastián is of 24 years, whereas that of Las Palmas is in 13 years.
Within the same city or locality, the PER also varies. For example, the areas with the highest demand and considered as more consolidated, tend to have a higher PER.
In this sense, the sale price per m2 of the Chamberí district (Madrid) is 4,291 euros, while the rental price is 16.7 euros m2 / month (204 euros m2 / year), according to data from the idealista.com. From dividing the purchase value against the annual rent you get a PER of 21 times. For Villa de Vallecas, with purchase price of 1,970 euros / m2 and rent of 9.6 euros m2 / month (115.2 euros m2 / year), the PER drops to 17 years.
3) The best houses tend to have a higher PER
In line with all of the above, for the best houses or those that are in better condition is usually pay an extra price for the security that implies investing in them. Lower quality homes usually have a lower PER.
All these facts, lead to the reality that for expensive houses it might be cheaper to rent than to buy. In fact, there are people who can pay rent in a good area of the cities, but that could not buy the apartment in which they live as tenant.