Valuing Residential Property from LHA rate tables

I had occasion to look at three separate areas yesterday to determine the Local Housing Allowance (LHA) for 2, 3 and 4 bedroom properties since I thought the private rent for a 4 bed of ours was too low, and was contemplating letting it to tenants with housing allowance.

https://lha-direct.voa.gov.uk/Secure...?SearchType=LA

After noting both the regional, local and time based variations in LHA allowance in the different areas, it occurred to me that I had not thought previously of using this as an independent method of valuing a property.

Anyone who has read Ajay Ahujas' book Beating the Property Clock will know that Ajay refers to the "intrinsic value" of a property. The intrinsic value to one investor may not be the same intrinsic value to anther investor, but Ajay calculates intrinsic value to determine if a property in a particular area at a particular point in time in the life cycle of property price increases and decreases is above or below intrinsic value.

Intrinsic value is the price of a property below which it will be attractive for an investor to purchase, and is related to the gross yield or return on capital value of that property.

Capital value is what you paid for it.

Target Gross yield is monthly rent x 12 divided by capital value, and it's this target that you set in your mind as a minimum achievable yield.

Let's say that your target gross yield is a minimum of 8% per year.

Intrinsic Value = Annual rent divided by gross yield.

You are looking at a 3 bedroom property that has an LHA allowance of £135 per week in the rate table of the web link above. So £135 per week is £584.55 per month or £7,020 per year.

Intrinsic value = £7,020 / 8% = £7,020 / 0.08 = £87,750.

So this is the target maximum price you are prepared to pay.

If properties in that area are selling for £75K, you know they are selling below your intrinsic value. If they are £100K, you know that they are selling above your intrinsic value, but you also know that you would not pay more than £87,750 for it, no matter how much Below Market Value you are offered.

This is the difference in approach from pure BMV to BMV qualified by intrinsic value.

In 2009, it is possible to purchase a property for £32K with an intrinsic value of £71,250 but before you go running off buying, bear in mind that the intrinsic value calculation assumes that your target gross yield is actually achievable.

If this property were in an area known to have social behaviour problems or likely to suffer from long voids, your gross yield target would obviously be somewhat higher than 8 percent.