Beyond Rental Yield: The Buffett Approach to Property

Welcome to Financial Fluency - your weekly guide to mastering financial English and understanding the world of investing.

In this issue:

• A Look at the Markets: Rolls Royce plc

• Beyond Rental Yield: The Buffett Approach to Property

• Quote of the Day: Warren Buffett

• We value your feedback

• Word of the Day: Subdued

• Test Your Knowledge

• Whenever you are ready, here is how I can help you

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A Look at the Markets: Rolls Royce plc

Trade of the Decade

My trade of the decade has turned out to be Rolls Royce plc (with 5 years to go!)

In 2020, during Covid, I was organising weekly Zoom meetings for my Business English students. One of the trades to come out of these meetings was Rolls Royce plc.

I bought Rolls Royce plc at £0.85 (not the lowest entry but good in hindsight). I watched it grow to £1.50, did not take profit and watched it retreat below my initial purchase price. Fortunately, I bought some more shares.

As I write this on the 12th June 2025, it is £8.88. This represents a 944% return on investment or 58% annualized.

For full transparency, I have taken partial profits along the way. But it remains an excellent trade.

Beyond Rental Yield: The Buffett Approach to Property

How to calculate what that rental apartment is actually worth

In the last two weeks, we've been analysing Apple using intrinsic value and Warren Buffett's discounted cash flow method.

The conclusion? Apple might be overvalued by 38%.

But here's the thing about investing wisdom: if it works for the world's most valuable company, it should work for a simple rental property too.

Why Property Investors Need DCF

Absolutely every property investor should use discounted cash flows before buying an investment property.

Yet many don't.

They rely on gut feeling, estate agent promises, or simple rental yield calculations. This is like driving blindfolded.

The Buffett Principles (Property Edition)

Remember Buffett's three rules from our Apple analysis:

1. Future cash flows must be discounted to the present value

2. The discount rate should reflect risk and uncertainty

3. Always be conservative in your estimates

Property investing is perfect for this approach. Unlike company valuations, rental income is fairly predictable and tangible.

A Real Example: The €75,000 Italian Apartment

Let's say there's a 2-bedroom apartment for sale in your local Italian town for €75,000.

Will it make a good investment over 10 years?

As we did last week with stock investing, we need to make some conservative assumptions:

Monthly rental: €500
Occupancy rate: 83% (10 months rented per year)
Annual rental income: €5,000 gross

But rental income isn't just profit. We need to subtract the costs:

Income tax (21%): €1,050
Property tax: €400
Insurance: €250
Maintenance: €500

Annual net income: €2,800

What Might the Property be Worth in 10 Years?

Property markets are subdued in Italy these days.

For this reason, let’s assume a modest 1.5% annual increase:

€75,000 × (1.015)^10 = €87,000

So after 10 years, you'd own a property worth €87,000.

The Discount Rate

For Apple, we used 7% (4.5% risk-free rate + 2.5% risk premium).

But property is different. It's less liquid than stocks. Tenants can be difficult. Boilers can break at inconvenient times.

I view property as a riskier investment than equities, so let's use a 9% discount rate (4.5% + 4.5% risk premium).

The DCF Calculation

Here's what our 10-year cash flow looks like:

Total present value of rental income: €17,974

Present value of final property sale: €87,000 ÷ (1.09)^10 = €36,732

Total intrinsic value: €17,974 + €36,732 = €54,706

The Verdict

The property is priced at €75,000.

Our intrinsic value calculation suggests it's worth €54,706.

On this basis, the property appears overvalued by 27%.

I should be clear that the purpose of this exercise is not to encourage or discourage you from investing in property. This newsletter gives you a basic idea of how to work out the intrinsic value of any investment property that you might be interested in.

Next Week's Preview

Does this mean you can never buy property for investment?

Absolutely not.

Next week, I'll rework these figures with an increased annual growth rate (e.g. more desirable area) and short-term rentals such as through Airbnb.

Sometimes changing your assumptions - or the location - can transform a poor investment into an excellent one.

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: Warren Buffett

I return to this famous quote from Warren Buffett which perfectly captures today's property analysis. Price and value are rarely the same thing.

We Value Your Feedback!

Your opinion helps us improve and lets you suggest topics or ask Business English questions for future issues.

Word of the Day: Subdued

Subdued - adjective - quiet; lacking in energy or activity; restrained or controlled in intensity.

From Latin "subducere" meaning "to withdraw" - characterized by reduced intensity, muted activity, or controlled restraint.

Context and Usage: The term subdued is frequently used in business and economic contexts to describe markets, demand, or activity that is below normal levels. It can also describe personal behaviour (quiet, restrained) or physical conditions (dim lighting, muted colours). Unlike "depressed" or "collapsed," subdued suggests temporary restraint rather than serious problems.

Common Collocations:

Subdued market - a market with low activity or trading volume
The housing market remains subdued following recent interest rate rises.

Subdued demand - reduced interest or purchasing from consumers
Retailers reported subdued demand during the usually busy holiday season.

Subdued growth - slower than expected economic expansion
The company posted subdued growth of just 2% this quarter.

Subdued tone - quiet, restrained manner of speaking or atmosphere
The CEO adopted a subdued tone when discussing the redundancies.

Business Example: Despite strong fundamentals, investor sentiment remained subdued following the central bank's hawkish comments about future monetary policy.

Economic Context: Many European property markets have been subdued since 2022, with both buyers and sellers adopting a wait-and-see approach amid economic uncertainty.

Test your knowledge

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.