How much should you pay? … The sequel…

A friend of mine (let’s call her Rabbita) thinks that the formula from my previous post is too complicated and difficult to implement, and I agree to a certain extent. After all, like I said, it’s really subjective how much value you put into each item on the list. For example, a nearby MRT is usually a plus, but a person who goes everywhere by car might not care if there’s an MRT station near the place, or he might even think that it’s a nuisance.

Rabbita’s suggested method is to set a budget first, and make sure the price plus renovation costs fit your budget. It’s intuitive and makes budgeting sense. Most people will probably do that if they plan to buy for their own stay. After all, buying a home is usually an emotional thing and some things just can’t be quantified.

I’d say my method would be more useful if you don’t have a fixed budget, but are looking for an interim own-stay property or a full-out investment property, with the intention to sell in the future. In this scenario, you don’t want to pay above the market and you’d also want to take into account the pros and cons of the place from the perspective of a tenant and landlord. The method is also nice for nerds like me who like to calculate stuff.

Perhaps to illustrate further, I will put down a few of the things I look out for and the values I attach to them, together with my rationale. I must emphasize that the values are pertinent to my value map and may not apply to everyone…

1. Age of property:
I generally deduct about $5 per year after TOP for renovation expenses for wear and tear. I estimate that a property requires a major renovation every 10 years or so, and as an owner, I would likely fork out a maximum of $50,000 per 1,000 sqft space to replace pipings, electricals, appliances, whatnot. So $50,000/10 years/1,000 sqft = $5 psf per year.

Hmmm…needs work!!

For leasehold, depreciation starts pretty slow. To make things simple, I take 15% depreciation in the first 30 years i.e. 0.5% per year; 60% in the next 40 years or 1.5% per year; and 25% in the last 29 years or 8.6% a year. Which is to say, if my benchmark is a new property that costs $1,000 per sq and the subject property is 10 years old, I will deduct $50. Alternatively, if I were to make an offer on a 40 year-old property, given the same benchmark, I would deduct 30% (15% for the first 30 years and another 15% for the next 10 years) or $300 psf for lease run-out.

Golf indoors instead of out in the elements…how much is that worth to you??

2. Facilities:I may or may not use facilities like the pool, gym, clubhouse if I lived at the property, but from the viewpoint of a landlord, it might be important to a tenant, and therefore affects the rent that, in turn, affects me. Therefore I need to take that into account when making the offer. Generally speaking for me, each of these facilities carry for me a fixed $50 penalty if they were absent. It’s kinda arbitrary, but a gym membership would cost me about that much per month, so that’s what I take as the figure for each of those 3 basic facilities. On the other hand, I may add between $15 – $25 per facility for additional facilities like steam room, tennis courts etc.

3. Transport:MRT stations are great to have in the vicinity. Other than the obvious transport convenience, they sometimes also bring more food and retail options to a place. That’s value worth paying for. To quantify the value, consider how much your time is worth, multiplied by the time saved per year, multiplied by the number of years you’re intending to keep the property.

The expanding MRT network has brought new life to previously remote locations and new appreciation potential to properties in those locations

Of course there are other criteria, but the list never ends. The 3 above should be enough food for thought for now on how to quantify them. Hope this helps.

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