anup.thakare

I got following information about how to calculate true value of a property. It is called True Value Test.



I am, however, not able to understand all the terms in it but the stuff seems to be useful for novices like me.



May be realacres, sansei or anybody on the forum can help us better understand this.



True Value Test:

Most people end up buying a property at a price that is more than its value. As a result, they have to either wait unduly long to get a good return or sell at a loss.
Follow these steps to correctly evaluate a rent-worthy property. Assume the asked price is Rs 35 lakh and the down payment is Rs 8.75 lakh (or 25 per cent of the property's value)
Step 1: Expected net operating income (NOI)
This is rental income minus operating expenses such as repairs. This cost excludes EMI
Rental Income - Operating Expenses = NOI
Rs 2.4 lakh-Rs 15,000= Rs 2.25 lakh
Step 2: Annual debt service amount
Lenders want the expected NOI to cover your annual debt obligation. So, they lend in a way that the repayment is covered by the NOI. If the bank wants a debt coverage ratio of 1.15 times, the annual debt service amount will be Rs 1,95,652.17
NOI / Debt Coverage Ratio = Annual Debt Service
Rs 2.25 lakh / 1.15 = Rs 1,95,652.17
Step 3: Debt service ratio
This is the annual debt obligation as a percentage of the total loan
(Annual Debt Obligation / Home Loan Amt)* 100 = Debt Service Ratio
(Rs 1,95,652.17 / Rs 26.25 lakh) * 100 = 7.45%
Step 4: Rate of return on your down payment
This depends on NOI yield and down payment portion
NOI Yield * Down Payment Contribution = Return on Down Payment
[(Rs 2.25 lakh / Rs 35 lakh) * 100 = 6.43%] *
[(Rs 8.75 lakh / Rs 35 lakh) * 100 = 25%]
6.43% * 25% = 1.61%
Step 5: Market capitalisation rate
This is the sum of the debt service ratio and the return on your down payment
Debt Service Ratio + Return on Down Payment = Market Capitalisation Rate
7.45% + 1.61% = 9.06%
Step 6: Property's right value
This is the true value of the property (V). This calculation shows the property is worth Rs 24.84 lakh, which is lower than the asked price of Rs 35 lakh.
NOI / Market Capitalisation Rate = V
Rs 2.25 lakh / 9.06% = Rs 24.83 lakh

anup.thakare

No one interested?

realacres

Very simple formula:-

Price of property (max) = Rent/month it would fetch * 200

This is irrespective of the loan amount you take & miscellaneous charges as in this case renting doesn't become a viable option.

akssenti

Saw this article on rediff and like most of their articles this too did not make sense.

Sansei

On leave at present for few days.


Agree with reals thumb rule.

But only part missing is sentiments / bldr greed which cannot be

quantified. Hence all property seems to be overpriced at current levels,

using pure mathematics/logic.

mukesh_pednekar

Yes ... it is as straightfoward as that .... but 5% (*200) rent is difficult to find in any type of property market ..... I would be more than happy to receive 4% (*250) rent ....
The cost:rent ratio in current market looks bizarre ... for the above to happen .... either the rent has to shoot up or the property prices have to come down ..... u all know what looks more likely