The Investment Method Flashcards
What is capitalisation / capitalisation rate or capital value?
Annual rental income divided by the yield x 100 = capital value
Example
£100 a year
———— X 100 = £1000
10% yield
What is yield?
Yield refers to the earnings generated and realised on an investment over a particular period of time and is expressed as a percentage based on the invested amount.
Income (———— ) x 100 = yield Price.
Basically what is the return for the investor after say 1 year
What is perpetuity?
Perpetuity refers to an infinite amount of time. No fixed end date
What is then needed to follow the investment approach of valuing?
. No outgoings ( Rosie’s, insurance etc
. Assumption of perpetuity
. Need to ascertain yield by comparison with sales of similar property investments in the market.
What terms do tenants take when letting a property for the purposes of assessing the investment method?
. Single tenants are usually let to an full repair and insuring terms (FRI)
. Multi tenanted buildings such as multi storey offices and shopping centres are let to individual tenants on Internal Repair (IR) terms however the landlord will recover all outgoings by way of a service charge.
What is needed to calculate what an investor can afford to pay?
The investment will be calculated by each year of the investment x the income x the present value of the £1 @ the yield percentage then the sum of the present value (PV) is calculated to reveal how much the investor can afford to pay to get the 10% yield
What two tables in Parry’s help to carry out an investment valuation?
. The PV of £1
. The PV of £1 pa
What to look for when doing assessing an investment method?
. Check the lease or rent book
. Check the rent against the rental value (comparables)
. Outgoings on lease
. Most residential leggings the landlord is responsible for external repairs and the structure including services and external decorations.
What other outgoing may be in existence for residential property?
. 10-15% of the rent plus VAT is normally deducted for management from a letting agent
. Insurance
. Possibly Cleaner or services such as paying for the lift
What to bear in mind on a residential investment?
The rental return on a residential property are relatively low as the investment is the acquisition of the property with the rent used to repay any loans on the property
When is the investment method used to value?
. Shops
. Offices
. Industrial and warehouse
Which are:
. Let as investments
. Owner occupied
. Vacant
What are the majority of comparables for this method?
. Rents (lettings, Rent reviews, lease renewals)
. Investment transactions (these can be from a wider area)
How can the investment method be expressed in a simple calculation?
Market Rent (Net of Outgoings) X Years Purchase (YP) = Market Value
What additional outgoings night need to be deducted? Such as in fully residential lettings / fully serviced offices
. Internal decorations . Water charges . Electricity . Gas . Window cleaning . Gardening
Multi-tenanted buildings such as multi-storey offices and shopping centres
The landlord will recover all outgoings by way of a service charge therefore the rental income is the net income
How is the Years Purchase (YP) in perpetuity calculated as?
100/YIELD
Recent comparables should be analysed to determine:
- The Market Rent (MR)
- The YP and market capitalisation rate / all risks yield (often just refer to the yield)
Calculate the yield on an £100,000 Rent per annum where the investment sold for £1,500,000.
100,000 / 3.600 sq ft = £27.78 per sq ft
(purchase price) / (Rent per Annum)
£1,500,000 / £100,000 = 15.0 YP (Years Purchase)
100 / 15 = 6.6% yield
In other words the investment sold at 15 times the market rent
The investor will recoup the capital invested in 15 years
The net income gives an initial 6% return on the capital invested
Once a comparable is found the yield can form part of a valuation to give a market value of a similar office.
Calculate the market rent per annum x YP perp @ say 6% = Market Value
Market rent £75,000 p.a
YP perp @ 6% 16.6667
Market Value £1,250,000
Why is the yield also known as the all risks yield?
As it considers all the risks of the investment, which include:
. The property . The quality of the tenants covenant . The amount of rent ( I.e market rented, under rented, over rented) . The unexpired lease term . The other lease terms . Anticipated rental growth (location)
What is compounding?
Compound interest is when interest is added to invested cash and interest is also added to any interest previously paid.
So if £1 is invested for 5 years at 6% per annum interest, payable annually in arrears it will accumulate to:
(1 + 0.06)small 5 = 1.06 small 5 = 1.3382 = £1.34
Or use parry tables
When speaking about rental and capital growth
We are referring to compound growth
What is forecasting?
Forecasting. Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be estimation of some variable of interest at some specified future date. Prediction is a similar, but more general term.
What is discounting?
The reverse of compounding!
It is the calculation of the amount of cash that needs to be invested today to provide the future amount over the time period at the applicable rate of interest.
The applicable rate of interest is the discount rate
The present value of £1 per annum
Will always have a lower PV Present Value than if the income was received immediately.
Where should you look to obtain the present value of £1 per annum?
Parrys tables
How would you value a HMO?
The investment method
