Thinking of buying a property and not sure whether the price is right?? To estimate the value of a property is not as difficult as you think. With some information from the market, you can do the estimation just like a professional valuer.
Always remember that the value of a property depends on the potential income the property can generate – annual rental income. This has been the guideline for valuer to perform property valuation and for government to derive property tax (quit rent & assessment fee).
A simple term used to estimate value of a property is rental yield. However, we call it capital rate instead of rental yield when we talk about valuation. But the formula is similar, i.e. capital rate = (annual rental income)/(property value)
To determine a property’s fair value, simply change a bit of the same equation:
Expected property value = (expected annual rental income)/(capital rate of property in the same market)
For example, in Johor Bahru normally the capital rate for apartment we use is around 6.0%-6.7%. Say if you have a unit with average monthly rental income of RM1000 in the market, annual income will be RM12,000 (RM1000x12). From the equation, your property value should not be more than RM200,000 (RM12,000/0.06).
Capital rate depends on the type and location of the property. You can easily estimate the capital rate for your property by asking the latest average rental income and selling prices in the same area from your property agents.
On the other side of the coin, valuers and government get the data of market average rental and property prices from the stamp duty records (tenancy agreements, sell & purchase transactions) of HASIL (Inland Revenue Board) and land office.
Estimating the value of a property is important for us to negotiate with seller, as well as to estimate return on investment (ROI).