Applying Izu's 100-200 Property Valuation Rule

Today, I wanted to look at three examples where the property valuation rule could have been used to save a headache. If you are going to overpay for your home or investment property you may want to think about using the property valuation rule as one more guideline in your arsenal. The reason is that if rents are a certain rate, than the value of the home in that area can only go down so far, before a renter says, "Wow, prices are really low compared to my rent." In general, if the mortgage, property taxes and insurance combined cost less than rent, you will have no problem finding a buyer.

The first example is a home that was purchased for $730,000 with $500,000 down. The house would have rented for about $2,700 per month. My estimates would put the value somewhere between $270,000-$540,000. Sure enough, when the housing bubble burst, the value was then estimated to be $400,000. This person was able to keep the home because there was such a large down payment. Staying power will allow the person to own the home long enough to recoup some losses.

The next example is of a home that was purchased for over $600,000. The rental price was around $1,700 per month. According to the rule, the value would be between $170,000-$340,000. Sure enough after the burst, the family sold the home for $320,000. Overpaying in the first place along with leaving little room for error can be devastating.

The final example is a case where the rental prices actually decreased. The rental value was around $1,000 and the purchase price was $160,000 (my estimate would be $100,000-$200,000). This was an investment property. The rental prices than proceeded to drop to around $500 and the value of the home dropped down to $40,000 (my estimate would be $50,000-$100,000). The rental property was then lost. As an investment property, the target purchase price should have been closer to $100,000. Remember, if the numbers don't make sense, don't do the deal. This would have allowed some room for error and still been manageable when rent prices fell. The investor simply would have had to tighten up the budget, as if the home was one being used for personal use. In general, this is doable after having gained some experience renting the property.

Here are some articles to support valuating prices based on rent:

• http://finance.yahoo.com/news/don-t-buy--these-7-cities-are-renters--markets.html
• http://www.businessinsider.com/best-cities-buying-a-home-2012-8?utm_source=0817&utm_medium=yahoo&utm_term=&utm_content=&utm_campaign=partner#detroit-michigan-3

Dedicated to Wil Andrade

This post was reposted from http://sizuservices.blogspot.com/2012/11/applying-izus-100-200-property.html, originally written on November 11th, 2012.