What does the purchase price factor actually indicate?

How the factor is calculated

The factor is calculated by dividing the purchase price by the annual net cold rent. For example, if a multi-family house is for sale at €1.2 million and generates €60,000 per year in rent excluding operating costs, the purchase price factor is 20. In this example, the investor would be able to generate rental income equal to the purchase price within 20 years.

The reciprocal of the factor is the yield, meaning 100 / factor = yield in percent. This means that a factor of 20 corresponds to a yield of five percent.

Only purchase price and rent are decisive

Other influencing factors, such as rent increases, inflation, and capital costs, are ignored when calculating the purchase price factor. Aside from the purchase price, only the current rent is decisive. If the rents in our example were higher, the purchase price factor would be lower, and the investment would pay off faster. Simply put, a lower purchase price factor is advantageous for an investor.

However, it is also associated with higher risk. The factor reflects the risk in real estate investments, just as in other forms of investment. This means: higher factor, lower risk; lower factor, higher risk.

Where the significance of the factor ends

If an investor is presented with three investment opportunities, they might compare the purchase price factors, assess their risk tolerance, and invest in the corresponding property – one might think. But it is not that simple. The purchase price factor provides only a rough guideline to estimate the potential prospects of an investment.

Both the rents and the current market value of a property—the two numbers that determine the factor—are influenced by micro- and macro-location as well as other aspects such as possible vacancy and renovation backlog. For a reliable property valuation, other indicators should also be taken into account. Additionally, for the yield, stable rental income and the property’s value stability are relevant.

We determine the factor for your multi-family house

Appraisal committees usually record only sales prices and not the factors/yields based on rental income. Engel & Völkers has been recording purchase price factors for residential and commercial properties at many locations for decades.

If you are interested in a valuation of your multi-family house, speak with our consultants about your individual market price assessment.