Father Sez

From and to parents - parental advice to our children on personal financial management and life.
Search Blog

What is the right value for a house? The Millionaire Mommy’s view

Wednesday November 26th, 2008 by fathersez

In April 08, and in my view, before the sub prime issues really hit the fan, the Millionaire Mommy Next Door (one of my seriously favourite blogs, by the way) wrote a great post on this topic.  

The post was in response to one of her readers seeking MMND’s views on the indicators and trends to look out for in making a decision to buy a home. MMND listed three indicators: 

-         Price to Rent Ratio,

-         Would buying at that price make financial sense to a landlord and

-         An old rule of thumb of price against gross rent. 

She presented numbers and statistics and concluded that prices may be still elevated.

To those not familiar with MMND, perhaps the following extract from her about page might establish her credentials and also explain why I am such a big fan. 

Quote 

When we were 30, my husband and I decided we wanted to be parents. It was important to us that we didn’t repeat our parent’s mistakes. Since we had always wanted to parent through adoption, we didn’t have to be concerned about my ticking biological clock– we could wait for the right time.

Over the course of a couple years, I learned about personal finance and created a lifetime financial plan that would allow my husband and I to be free of our money worries by age 40. It worked.

We are now proud and happy stay-at-home parents to our wonderful, young daughter. Financially free, our family hasn’t set an alarm clock in years. Whether it be work, parenting or play, we wake with the sun, eager to spend each new day doing whatever we choose.

We consider ourselves closet millionaires. Our family lives a typical middle-class lifestyle with one fantastic exception– we only work when we want to. Financial freedom affords us free time. Contrary to popular belief, most millionaire households do not live the extravagant lifestyles that many assume. In fact, a millionaire or two may be living inconspicuously next door to you.                                                                 Unquote 

Some of you may remember that my wife and I had written about us selling an investment property we had, a house. This house had been rented out prior to the sale. So more out of curiosity, I compared MMND’s figures against “our case”. The house was sold in April 08, so the timing was perfect. I wrote about the sale here and here.

Based on statistics, MMND took the view that the price to rent ratio should be around 11.6.  In our case, the price at which the house was sold against the annual rent we were getting was an astronomical 32.5.  

Either, my wife and I had seriously undercharged the rental (which I doubt, as we checked the newspapers on rentals charged by other houses available in the neighbourhood) or equally seriously overpriced the house. However I remember that the property agent telling me that the buyer’s father in law’s first statement after he saw the house and knew the price was that it was cheap! 

I also remember my friend AK, telling me many years ago that rental yields on landed property in the metro areas of Malaysia should be in the region of 4% or a P/R ratio of 25. He is a property valuer so he should know what he was talking about.  

So there seems to be some anomaly in comparing prices in Malaysia and the US Metro areas. I don’t know if the high ratio is a Malaysian “thing” or an Asian “thing” or if there is a real mighty tsunami coming for the property sector in Malaysia. 

Whatever the case, we are happy that we have sold the house and when my children get into property investing (notice that I did not say “if”), I shall advise them to use MMND’s principles and search until they get the right fit.  

Bookmark and Share
Categories:

2 Comments for “What is the right value for a house? The Millionaire Mommy’s view”

On December 8, 2008
At 1:26 pm

Thanks for the nice comments about my blog! I’m so glad you enjoy it. I’ve been meaning to run the numbers again to see if they’re getting closer to where they should be in my area — I don’t think they’re quite right yet… Good thing I’m patient.

You may not know that my original blogspot.com website was hacked and disabled in October. Therefore, I had to move to a new domain. Would you mind updating your links / blogroll with my new URL address? It’s http://www.millionairemommynextdoor.com

You can read about what happened to my original blog here:
http://millionairemommynextdoor.com/2008/10/hacked-moved/

Thank you!!!

On December 9, 2008
At 10:28 am

Hi, MM,

I am sorry to hear about your blog being hacked. Wonder how much the world would gain if these guys (or gals) put their obvious skills to more productive use.

I’ll change my blog roll. I am very far behind in reading the posts in my feed so I must have missed your posting on this unfortunate event.

Thanks for dropping by and take care.

Regards

Leave a comment

(required)
(required)

Blog Subscription

Like what you are reading?
Subscribe to my RSS Feed