How long will your tenant live?
Posted by markharrison on March 16, 2007
I had a question from one of my mentoring clients today, which brought up an important point.
Without going into any of the details, he had been approached (in response to one of his leaflets) by a retired home-owner, who was interested in selling on his house at a reasonable discount to market value, thus releasing some equity.
All good so far – however, the home-owner wanted to carry on living in the house, and wanted to be guaranteed a tenancy for the rest of his life.
These kind of deals are often known as “reversionary” deals – in which much of the “benefit” of the property only reverts to the investor after something else has happened – notably the death of someone.
However, for my mentee, the question that needed answering in order to do a proper analysis of the investment was “how long will he probably live?”[BTW – the current age of the tenant is something I’m going to change from the actual case, to protect everyone.]
This is something that’s easy to miscalculate – it’s an easy to make the error that “the average life expectancy is 76 – this chap is 72, therefore, we’d expect him to live another 4 years.
Buzz – incorrect.
The 76-year average takes into account EVERYONE, including those who died before they reached adulthood, or in their 30s, or whatever. We know that the 72 year-old wasn’t one of these people.
In fact, what we need to use is something called “conditional probability”. This is the probability that “something will happen” once we already know that “something else has happened”. In this case, we already know that the guy has lived to 72 years of age… so the question is “what is the average life expectancy for a 72 year old.”
Fortunately, we don’t need to work this out – there’s a website called the GAD, which is a UK Government website, that has done all the projections for us. In fact, the average UK 72 year-old has another TWELVE years of life ahead of them.
If you are considering these types of investment, then it’s vital to understand this – rather than (on average) getting such an investment payout in four years, you’d actually (on average) have to wait three times as long.
Oh, and personally, I don’t have any reversionary investments, not because they don’t make money, but because I never want to be in the position where I might be sitting around wishing for someone to die!