Guide to know if an apartment is expensive or cheap
When buying an apartment, it is essential to assess whether the price is appropriate for its value. To do this, different factors must be taken into account such as location, quality of materials or the situation of the real estate market.
Buying a house is one of the most important financial decisions for a person, since it involves a high and long-term outlay. For this reason, it is convenient to analyze different variables before making this decision, such as the price, the location, the quality of the materials or if it responds to the real needs of the people who are going to live in it. It is common, therefore, that doubts arise from the financial level: how do I know if the price of the house is adequate? Will I be able to face the mortgage payments? Will the apartment lose or gain value with it? weather?
How to calculate the price of an apartment?
In the financial field, experts analyze profitability to find out the relationship between the benefits provided by a certain operation and the investment made.
In the case of housing, analysts use two concepts to know the value of a property:
- The gross rental return
It is the percentage resulting from dividing the money paid per year for the rent by the sale price of the house and multiplying it by 100. That is, a flat that is rented for 1,000 euros per month (which would mean 12,000 per year euros of income for the owner) and that has a sale price in the market of 300,000 euros, it will have a gross profitability of 4%.
Example: (12,000 / 300,000) x 100 = 4
The higher the gross profitability, the more favorable it will be for the owner, while the tenant wants just the opposite, since, in this way, he will pay less in relation to the price of the house. Knowing the gross profitability it is possible to find the net profitability, subtracting the expenses that the property has.
- The PER
Another important magnitude is the price earning ratio (PER), which determines the number of times the rental price is integrated into the house price. In this way, the number of years it will take to pay a property with the current rent that is being paid will be known.
To calculate it, you have to do the opposite operation to that of gross profitability, since you have to divide the current sale price by the annual rental price. Following the previous example, if the 300,000 euros of the sale price are divided by the 12,000 euros of annual rent, it is obtained that the rent would have to be maintained for 25 years to fully pay for the house.
Example: 300,000 / 12,000 = 25
A landlord is interested in getting a PER, the lower the better, since it will be easier for him to improve his profit margin on a given date; instead, the tenant wants the PER to be as high as possible.
The importance of equivalences
Every three months, the Bank of Spain publishes an update of the gross rental profitability throughout the country. Between 2018 and 2020, this magnitude has moved in a range of between 3.7% and 4%, which, transferred to the PER, represents a range of between 25 and 27 years (around 320 months).
These data are very important, since knowing two of these figures – sales price, rental price or PER – it is possible to calculate the third. Applied from a practical point of view, it means that, taking as a reference a house similar to the one in the example (300,000 euros), it is simply necessary to multiply the price of the monthly rent by 320 months. In this way, a suitable approximate selling price could be obtained.
Continuing with the same example, a property that has a monthly rent of 1,000 euros, if that figure is multiplied by 320, it would mean that its sale price should be around 320,000 euros, according to the current market situation.
And how to set the rental price? For a home that costs 300,000 euros, dividing this number by 320 would give the result that the optimal rental price in the current situation would be about 937.5 euros per month.
Is my house expensive or cheap?
As is logical, two properties with the same size usually have a different PER, since several elements influence to set their price in the market. Perhaps the two variables that most influence are the location and the quality of the construction. In Spain, the price per square meter is very different in cities like Marbella’s Golden Mile than in other smaller towns. Like, within them, there is a lot of variation between the neighborhoods considered premium and those that are not. In these areas, the PER is usually high.
For example, according to the table on the evolution of the price of housing in Marbella’s Golden Mile, in July 2021 the price per square meter was 6,063 euros, marking a new historical maximum; while in San Pedro de Alcantara it was 1,711 euros.
Let’s take as an example two houses with an area of 100 square meters, located one in the Marbella’s Golden Mile and the other in San Pedro de Alcantara. In Marbella’s Golden Mile, the price of rental housing in July 2021 was 16.7 euros per square meter (1,670 euros per month). The PER of the house located in Marbella’s Golden Mile is set at 30.25, taking into account that its sale price at that market juncture would be 606,300 euros.
Example: 606,300 / (1,670 x 12) = 30.25
In the case of the San Pedro de Alcantara apartment, where the rental price is 10.4 euros per square meter (1,040 euros per month), the PER obtained is 13.70, with a sale price of 171,100 euros. That is, the lessor of this second district would obtain a much greater benefit at the expense of his tenant.
Example: 171,100 / (1,040 x 12) = 13.70
But the best way is to be informed and nothing better to be up to date in real estate investment.