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This is the definitive formula to know if a house for sale is expensive or cheap

Based on the location, age, condition of the home and the price of other similar flats, it is possible to guess whether the sale price of a home is expensive or cheap, although without any certainty. However, there is a very simple formula that puts an end to doubts. It is enough to know the rental price or the sale price to find out if buying that apartment is more expensive than normal and therefore it is more worthwhile to rent it, or if instead its sale price is a bargain and it is time to buy. Bakinter explains the methods that will allow you to solve this mystery and compiles a table of equivalences between different rental and purchase prices to check at a glance if the house of our dreams has a price through the roof or is close to earthly reality.

Methods for calculating the sale and rental prices of a home

With these two ratios on the rental price and the sale price you will be able to find out the sale price is expensive or cheap, and if it is therefore more worth buying or renting.

On the one hand, there is the net rent return, which is the percentage resulting from dividing the annual money that a rental home costs by its theoretical sale price. For example, a house that is rented for 12,000 euros per year (1,000 euros/month) and is worth 240,000 euros is said to offer a gross return of 5% according to this formula: (12,000/240,000) x 100 = 5% .

Doing the reverse operation, that is, dividing the sale price by the rental price, the PER (Price Earnings Ratio) is obtained. This data is equivalent to the number of times that the annual rental income is contained in the sale price or, what is the same, the number of years it would take to pay for a home through rent under current conditions. It is a universally accepted ratio to value assets such as companies, homes, etc.

Table to know if a flat is expensive or cheap

Esta es la fórmula definitiva para saber si una vivienda en venta está cara o barata

Knowing the data on the gross rental return for all of Spain offered by the Bank of Spain (BdE) updated quarterly, it is only necessary to know the rental price or the sale price to calculate the other missing variable. To make it easier, Bankinter has drawn up a table in which the rental price is related to the price that the home should have. The data has been calculated according to the latest data published by the Bank of Spain of a gross return of 3.7% for the second quarter of 2021 (PER 27.0 times). To go from one column to another, you must multiply or divide one of the data by 324 months.

For example, if a house is rented for 1,500 euros per month and you multiply that monthly rental price by 324 months, you would obtain that the sale price should be around 486,000 euros under current conditions. However, if the price for which it is sold is 550,000 euros, it is evident that it is expensive. In the same way, if you have in mind a house that could be sold for 270,000 euros, it would be enough to divide by 324 to know that its rental price should be around 833 euros per month. If it is below that threshold it is cheap and if it is above the rent is expensive.

Another example of application of this table is if you are facing a home or area where you can live by renting or buying. Bankinter explains that if you are sure that a home identical or very similar to the one you are interested in is rented for a certain price, currently it would suffice to multiply the monthly rental price by 324 months to obtain an appropriate approximate sale price. For example, a house whose sale price is 400,000 and that costs 1,000 euros per month for rent, that is, 12,000 per year. When calculating the PER of the home (dividing 400,000 by 12,000), the result is 33. This number is above the Spanish average, which is currently 27.0 times. Therefore, this house is expensive to buy and it would be better to live in it for rent.

Therefore, in short, "the lower the PER of a home compared to the Spanish average (27.0 times) the better it will be to buy it, while the higher it is, the better it will be to live in it for rent", explains Bankinter .

This simple method is used to make an approximate calculation that can be much closer to reality if other factors are taken into account, such as the fact that some locations are more expensive than others, such as the Chamberí area or the Madrid neighborhood, while others such as Aluche or Vallecas are cheaper. In addition, if the house is of higher quality and is in very good condition, it is normal for the sale price to be higher. For these reasons, it is usually more affordable to rent better houses than to buy them, since their PER is higher.

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