Take stock of a home’s price

How do you figure the value of a house? Comps and an appraisal are the usual means. But a recent issue of Forbes magazine suggests another interesting method: Figure out the price-to-earnings ratio, much like you would for a stock.

To make this calculation, you determine the rental value for the property and subtract operating expenses like taxes, insurance, and maintenance. Take the result–the net rental value–and divide it into the price of the house for the P/E ratio. For example, a $200,000 house with annual operating costs of $10,000 that could rent for $1,500 a month would have a P/E of 25. (200,000 ÷ [(1,500 X 12) - 10,000])

What do you do with this number? Compare it to P/Es for other homes in the area or some other city to determine if the house is priced fairly. Then again, you could just get some comps and an appraisal.

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