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What is a "reasonable" SFH P/E ratio?

gortnerpgortnerp
edited December 2008 in Seattle Real Estate
A house I am watching on Refin is Listing for $594,000. On another RE site, the same house is listed for Rent at $2,250 per month.

My math says the "P/E" of this house is 22.

Is 22 a "reasonable" ratio? If not, what would be "reasonable?"

i'm looking at this from the perspective of an owner-occupied house, not as a landlord.

(Sorry if this has been covered in previous posts. Just point me in the right direction and I'll check those posts out.)

Comments

  • rose-colored-coolaidrose-colored-coolaid
    In stocks, a P/E of 14 is supposed to be "fair". I think you can generalize this number to most investments. The goal is to figure out what rate of return on investment is good or bad, and a P/E of 14 returns around 7% a year. In stocks, you might not get that 7% back in dividends, because the company is reinvesting your cash in the business.

    Because you mortgage a house, you must consider mortgage interest rates as well as the risk of leveraged deflation. If interest rates were over 10% for instance, you'd need a P/E below 10 just to cover the interest.

    Also the maintenance costs for stocks are quite different than houses. In each, you may pay a tax when selling the asset, but in housing you pay an annual tax and have annual maintenance costs. Add it all up, and it seems to me like a good rule of thumb is that a house should return at least the mortgage interest rate plus 2-3%.

    At 6% rates, my guess is a P/E of about 12 would be considered a good investment, maybe even in a falling market.
  • gortnerpgortnerp
    14, Huh? Hmmm. 22 sounds a bit high, then.

    I used The Tim's post from yesterday as an example, and put in this Listing's numbers and got:

    Renting Buying
    Rent/Mortgage: $2,250 $2,278
    Insurance: $20 $167
    Property Tax: - $569
    Tax Savings*: - ($486)
    Maintenance: - $495
    Total: $2,270 $3,023
    *: (year 1 only, less standard deduction)

    yielding a monthly savings in renting of $753. Again, hmmm.

    I'm not convinced that purchasing this property would be wise, at this price.

    (I wish I could get the formatting correct to line up the numbers columns above...)
  • deejayohdeejayoh
    Take the inverse of the PE and you have the cap rate. That is a measure that is commonly used by property investors and you can pretty easily find what people are buying at today.

    They hit 7.5% in 2001 (13x) Maybe they will go lower this dowwnturn but I suspect at 7-8% you will see lots of people entering the market.

    http://en.wikipedia.org/wiki/Cap_rate
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