How to assess an investment property

Assessing a property is not a hunt for one number but the assembly of several. Each answers a different question, and none of them works alone.

Your total cost of entry

The first thing to work out is how much leaves your account between today and the day the property is registered in your name. That is the contract price plus the cost of completing the purchase: the lawyer, state duties, transfer taxes. It is this figure, not the price on the list, that belongs at the bottom of every calculation that follows.

Price per sqm — and what to compare it with

Price per sqm is only useful in comparison. Compare against properties:

• in the same location, not in the region at large;
• at the same stage of completion — an excavation and a finished building are not comparable;
• with the same specification — fitted out or not, the difference can be substantial;
• of the same size — a sqm in a studio is almost always dearer than a sqm in a large apartment.

If a property is noticeably cheaper than its peers, find out why. There is always a reason: the stage, the location, an encumbrance, the developer behind it. Cheapness without an explanation is not a discount, it is a risk you have not identified.

Stage of completion and the price of risk

The gap between the launch price and the price of a finished property is what you are paid for taking on risk and waiting. The earlier you come in, the lower the price and the longer the list of things that can go differently: the timetable, changes to the design, the state of the market by handover.

The right question is not how much the price will grow, but whether the discount is large enough for the risk you are taking.

The rental scenario, if you need one

Work it out like this: annual rental income, less every cost, divided by your total cost of entry. The costs include ownership taxes, maintenance, utilities during void periods, the management company's fee, repairs and replacing the furnishings.

In a holiday location, allow for seasonality separately: a year's income comes largely from a handful of months.

Liquidity: how you get out

This gets thought about last and deserves to be thought about first. The questions are simple: who buys this property from you in three to five years, how many similar properties will be on the market at the same time, and whether the seller offers a buy-back arrangement and on what terms.

An asset you cannot sell without a steep discount is only valuable on paper.

The stress test

The last step is to see whether the purchase holds up. Run the numbers again under three conditions:

• the increase in value comes to half the figure indicated;
• handover slips by a year;
• the property stands empty for a whole season.

If the purchase still makes sense after that, you are buying an asset. If it only makes sense on the most favourable scenario, you are buying hope — and it is better to know that beforehand.

One principle behind all of it

Every projection of this kind is a model. Models are useful for comparing options against one another and useless as a promise of an outcome. The actual value of a property depends on the market, the stage of the development and factors outside anyone's control.