Author Topic: Know your numbers, how to evaluate your next investment property  (Read 10909 times)

PadAdventure

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Hope this helps somebody looking to evaluate an investment property.  Cheers!
 


How to win going in-Properly evaluate your next property

These are the real numbers to my first ever rental property (a duplex):


GRM: 3

CAP Rate:  36%

Cash on Cash Return: 25.3%

If these numbers arenít making you salivate, this article is definitely for YOU!

Cash Flow:  $600+ per month after considering all expenses (mortgage, tax, insurance, utility share, repairs, vacancies, property management, etc) 
It actually produces around $800/month, for a single property, with very little skin in the game.

Thatís $800 per month, one property, cash flow after the mortgage and expenses have been covered by the tenants, each month.
That $800 per month is also barely, if at all taxed, with the deductions that are allowed.

Even better?  I bought the duplex at 25% less than a conservative estimate of itís market value.

I put the investor required 25% down, and was able to leverage the rest using bank money.

The bank gets 5% interest on their money on a conventional schedule, I make 25.3%.  Per year.
Not bad.  I obviously still own this property, and have others just like it.

How could I know this property would produce these results?  I knew it was a winner going in.

Hereís how.



INTRO TO SUCCESS

With investment real estate you either run the numbers, get lucky, get screwed or you end up somewhere in between.
 
There comes a point, and Iím guilty of it myself, when you just know the numbers will work. 

Run them anyway.  Your mistake could haunt you for 30 years, or more.

I canít tell you how many times youíll be ready to pull the trigger and find that surprisingly, the numbers donít work when you methodically evaluate a particular property.

For the uninitiated, this will be a good springboard, for the seasoned investor itíll serve as a refresher and reference.
This article will give you all the basics you need to quickly evaluate a property, and be armed with just about all you can to make the most informed decision possible.

Rental real estate, like any other instrument, is an investment--so you can lose your shirt, but you can also hedge your bet with relatively cheap and easy research.  Thereís nothing worse than realizing you have a dud when the paperwork has all been signed and you own it. 

You canít out manage a bad deal, and you donít want to be writing checks, you want to be cashing them.
The numbers will also make you more efficient.  Youíll know right away whether to delve further, or take a hike and move on to the next.  If the numbers donít work, your work here is done my friend.  It should be that easy.

So letís get started.


SET YOUR CRITERIA

What type of construction do you prefer?  Brick, siding, stucco, or other?   How many bedrooms, bathrooms, etc.  What types of property are in demand in your area? 

Are you looking for a single or multi-family property?  If itís a multi-family, are the utilities separated?   With older properties, especially single families, watch for functional obsolescence, i.e. a 3/1 with no real opportunity to increase the number of bathrooms, etc., it might hinder selling the property later.


SET YOUR AREA

What type of neighborhood are you willing to take on?

Neighborhoods that have higher crime rates and lower socioeconomic status will tend (not always) to be more difficult from a management standpoint, but will typically boast higher numbers. 

Think about what youíre willing to deal with for the likely duration you intend to hold the property.  A bad area may also hinder your ability to find a good property manager in the future when you want to increase the passive nature of your investment.

What areas do you pass on your commute?  What areas are close to your own home? 

Where do these areas connect/intersect/overlap?  Draw boundaries on a map , with distances you are willing to drive, a 10-20 mile radius is typically sufficient.  .  Use the scale on the map for a rough estimate for your radius.  Keep this map, you can use it again later.

What neighborhoods fit the homes you described in your criteria?  Are those areas affordable?  More importantly, using the average cost of homes in that area, do the numbers work? 


KNOW THE COMPS (Sales/Rental Rates)

Know what people are paying, the fair market rent rate (check your local housing authority website) how long similar properties are staying on the market, and finally  what the rental rates and vacancies are like for your targeted area.


BUY ON DISCOUNT

If youíre not embarrassed by your offer, youíre offering too much, period.  If it gets shot down, or the counter is beyond your established limit, it wasnít in the cards. 

Appreciation and equity are extras, do not factor them in until the property is successfully sold, closed, and funded.  Both appreciation and equity are as about as close as one can get to speculation. 

DO A DOWN AND DIRTY QUICK ESTIMATE, CALCULATE THE GRM (Gross Rent Multiplier)

GRM = GROSS MONTHLY RENT DIVIDED BY PURCHASE PRICE and then multiply answer x 100 for percent -- 

***this is also known as the 2% rule in some circles.

IF YOUR GRM IS:
<1   RUN
1   MINIMUM IF YOU EXPECT ANY CASH FLOW
2   CONSIDERED GOOD, THE STANDARD
2+    LIKELY GOOD.  ALSO LIKELY IN A WAR ZONE.

What the GRM does is roughly predict cash flow.  Cash flow is kingóitís the safest bet.  How do you predict the actual cash flow?  Glad you asked.


PREDICTING A PROPERTIES CASH FLOW

Predicting CASH FLOW comes down income and expenses.  Itís that simple.  People tend to overcomplicate the ďmathĒ and never get in the game because they over analyze their decision.

Hereís the breakdown for the two numbers you will need to predict cash flow.  We will start by determining  our GROSS INCOME.   

This is the total income, namely,Rent and any side income (coin laundry on site, etc) .  Youíre one step ahead in determining the market rent if the property is currently leased or was in the recent past. 

If thatís not an option, picking the brain of a realtor or property manager, checking local rental ads, AND looking up the municipalities fair market rent Rate (online with local housing authority)óand finding the mean between the three should help you arrive at a reasonable figure.

The second number you will need will be the MONTHLY EXPENSES.  These are critical, it cannot be stressed enough, so Iíll list them:

ē   Property taxes Ė Listed on the MLS, appraisal district website, or if worse comes to worse, anestimate will be available on online real estate sites such as RedFin, or Zillow.
ESTIMATE:  divide by 12 to get your monthly tax expense.
ē   Debt Service Ė If you took out a loan, this is your P.I./month (Principal and Interest)
ē   Insurance Ė shop around for quotes, vacant properties will cost you more.  Ask for a landlord or similar policy so you are covered appropriately.
ESTIMATE:  divide by 12 to get your monthly insurance expense.
ē   Property Management Fee Ė ALWAYS add this in.  Even if you are going to manage your own, some day you wonít want to, or the next owner wonít.  The numbers have to work for them too.
ESTIMATE:  10% of monthly rent.
ē   HOA - This can be anything, or nothing.  THIS CAN BE A CASHFLOW KILLER, BE MINDFUL OF HOA FEES!!!  The same goes for condos and townhomes with ASSESSMENTS.
ē   Vacancy - figure in 10%, your actual vacancies may be less, but this will give you a good cushion.  Donít try to fudge your own numbers, youíre only hurting yourself.
ē   Repairs Ė if the property is turnkey, newer or recently renovated, you can go as low as 5% of monthly rent.  If itís older, or not in tip-top condition, you could be looking at around 25%.  A conservative approach will typically serve you best.  Assume the worst.  Capital expenses can and will happen. 

CASH FLOW = MONTHLY RENT Ė MONTHLY EXPENSES  (which also gives you your NET INCOME)

One easy math problem, two useful answers!  You hope this number is positive.  If it isnít, run.  Fast.  Donít start re-calculating, donít start trying to make it work. 

At some point you will try this.  I have. 

Donít.  Run as fast and as far as your little chicken legs can  carry you.


CALCULATING THE RETURNS

These are the numbers that should start plucking at your little investment heartstrings.  Namely, they are the CAP RATE and the CASH ON CASH return.  The best part?  You already have all the numbers to figure these bad boys out.

You will want to calculate both numbers, as one (the Cap Rate) tells you whether or not the property is a good deal or not, and the other (cash on cash return) tells you what kind of return you are getting on your money.

Comparing the Cash on Cash numbers (percentage) between an all-cash purchase versus a financed one will quickly demonstrate the power of LEVERAGING with financing.  You get more bang for your buck!

THE CAP RATE

This gives you an idea if the property you are buying is a good deal or not.  It compares what amounts to the return on investment to the purchase price. 

Typically, the mortgage (P/I) payment is not included.  You will need the MONTHLY NET INCOME number you calculated above, and convert it to ANNUAL NET INCOME, BY MULTIPLYING YOUR MONTHLY NET BY 12.

CAP RATE = NET ANNUAL INCOME (without mortgage expense) DIVIDED BY THE PURCHASE PRICE

THIS WILL GIVE YOU A PERCENTAGE (ANSWER X 100).  If the number is less than 8%, itís a bust typically.  If itís greater than 8%, you can expect to do reasonably well.  Lower numbers are reserved for properties in desirable areas, higher, less desirable--or you found another unicorn, or a property with foundation issues.

CASH ON CASH RETURN

This number lets you know what you are getting in return for the money invested.  If you paid cash, the cap rate and cash on cash numbers are the same.

This considers financing andleverage.  So with this calculation, INCLUDE your mortgage payment that you subtracted when determining the cap rate.

CASH ON CASH RETURN = NET ANNUAL INCOME (with mortgage payment) DIVIDED BY THE TOTAL CASH INVESTED.



THE CAVEAT

The numbers are just that, numbers.  They have to be taken in context as far as where they are applied. 

A property in a war zone will undoubtedly produce much better numbers than one in a more desirable location .  You have to balance it with  your tolerance and  strategic goals.


RESERVE

You should always strive to have some cash on hand for emergencies.   

Some suggest as much as $10K per property, while others rely on spongy debt with credit, or a combination of the two.  Again, itís all about what youíre willing to tolerate.


SUMMARY

These fundamentals should arm you with a solid foundation to evaluate the financials of a property to allow you to win going in.  It may seem arduous, tedious, and death from a thousand wounds boring.

I can guarantee, however, that itís much better than owning a property with negative cash flow, or negative equity and writing a check each week, and stressing about repairs.

Take your time, do the math, apply the fundamentals and enjoy your investment.

Good luck, and happy hunting!
« Last Edit: March 21, 2016, 03:08:04 PM by PadAdventure »

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #1 on: March 18, 2016, 07:51:01 AM »
If anyone actually gets to this point (actually reads through), please let me know what you think (helpful, too fundamental, good or not so good).  Please chime in as well if you have anything to add, or a personal story/numbers (it would be interesting to see what kind of numbers people are getting in different areas of the country).

Thanks in advance!

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #2 on: March 18, 2016, 01:53:17 PM »
Oh, I took out the reference to my blog the other day, so as to not confuse my purpose.  I posted it here to be helpful, that's it.  I didn't know if it was too elementary or not.  I felt it would be informative to those starting out.

younggunner

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Re: Know your numbers, how to evaluate your next investment property
« Reply #3 on: March 20, 2016, 07:25:05 AM »
Good article! Informative!

Though reading this as a newbie, I have a question regarding what you posted as calculating your GRM.

You said under 1, run, and over two is good.. Is that referring in percentage?  Can you give an example?    What I am interpreting is that say it is a 1k a month rent.. If you meant that it's as a percentage, than given 1k month rent, my purchase price would have to be under 50k to be over 2%.. And if it's over 100k, RUN becuase it's over 100k.   Is this the correct way to interpret that?



PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #4 on: March 20, 2016, 08:22:29 AM »
Good article! Informative!

Though reading this as a newbie, I have a question regarding what you posted as calculating your GRM.

You said under 1, run, and over two is good.. Is that referring in percentage?  Can you give an example?    What I am interpreting is that say it is a 1k a month rent.. If you meant that it's as a percentage, than given 1k month rent, my purchase price would have to be under 50k to be over 2%.. And if it's over 100k, RUN becuase it's over 100k.   Is this the correct way to interpret that?

Thanks!

It can depend on the area, but typically a GRM of 1% will be difficult to cash flow.  If itís a desirable area, the general consensus tends to be the 1% is the minimum.  I feel that then you are counting on appreciation, equity building, etc, factors that I feel are speculation, and too slow developing to count on from a passive income standpoint.  They also open you up to losing massive capital if the markets shift, which we all know is possible.  You donít want to be in the business of writing checks to keep your operation afloat.

The caveat is that the interpretation of these numbers and their tolerance, or lack thereof, can sometimes depend on your goals. 

The GRM is a quick estimate.  If you run the other numbers on a 100,000 house, that produces slightly less than 1000 in rent, you will often see minimal to negative cash flow.  This can also be area dependent (property tax levels, insurance, maintenance, HOAís, etc).  The GRM is just a rough estimate.

You will want to run all the numbers on a prospective property.  It all depends on your goals.

Mine is passive income first, equity and appreciation second.  So the GRM is important.  Itís tough to make it work with SFR, you will often have to look at Multi-Family properties to make this work.

Hope that helped.
« Last Edit: March 20, 2016, 08:33:05 AM by PadAdventure »

Bigsacks

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Re: Know your numbers, how to evaluate your next investment property
« Reply #5 on: March 20, 2016, 09:07:08 AM »
What is GRM?

bobechs

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Re: Know your numbers, how to evaluate your next investment property
« Reply #6 on: March 20, 2016, 09:49:13 AM »
What is GRM?

It is another, more obscure, --and consequently better, this is real estate after all-- way of stating the 100 month rule: take the current monthly rental and add two zeroes to the end.  If that is less than the purchase price (and it generally is) you are virtually guaranteed to lose money, every month and at the end too.

If actually achievable rent for 100 months is double the purchase price you stand to make quite a bit of money.  These are scarce as hen's teeth.  Don't expect one to pop up annually, no matter how hard you look. 3X, 4X. 5X?  Dream on, brother.

Between those two thumbs you will need to analyze more closely to determine how much you might make, or lose, on a given property.

Losing is quite a bit easier because most sellers lean highly optimistic on how much of the future rent should go to them, by right.

Bigsacks

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Re: Know your numbers, how to evaluate your next investment property
« Reply #7 on: March 20, 2016, 09:57:36 AM »
So my latest rental I am in 26,000 total (15k to buy it and 11 to renovate) and it rents for 700 per month......

So that is a winner in your book?  I think so....if I have that right, I am terrible with numbers lol

That still doesn't tell me what GRM stands for.....

So add two zeroes to the rent...

$70,000.......this is more than the total investment of $26,000

Sooooo......GRM is 2.69??

What is GRM?

Gross
Rate
Money
?

Governments
Rig
Markets
?

Guys
Relish
Milfs
?
« Last Edit: March 20, 2016, 10:02:13 AM by Bigsacks »

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #8 on: March 20, 2016, 10:29:03 AM »
Gross Rent Multiplier.  I put it in italics next to the formula.  Itís hard to see though.  2.69 is awesome.  My best are around that.  My big producer is 3 exactly, as expected, itís a POS, but blue collar area, rents quick and Iím not dodging bullets when it comes to collecting rent.  Close, but itís a 3.
« Last Edit: March 20, 2016, 10:32:30 AM by PadAdventure »

bobechs

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Re: Know your numbers, how to evaluate your next investment property
« Reply #9 on: March 20, 2016, 10:31:03 AM »
You are paying 700 monetary units per month to rent a place you could buy outright for 11,000 monetary units? (16 months rent)

Mein Gott!  You need arithmetic lessons waaay more than reading if you think buying vs. renting is any kind of a debatable proposition.

But you asked for help with the reading part, so here goes..

From the OP, emphasis not mine.


DO A DOWN AND DIRTY QUICK ESTIMATE, CALCULATE THE GRM (Gross Rent Multiplier)

GRM = GROSS MONTHLY RENT DIVIDED BY PURCHASE PRICE

IF YOUR GRM IS:
<1   RUN
1   MINIMUM IF YOU EXPECT ANY CASH FLOW
2   CONSIDERED GOOD, THE STANDARD
2+    LIKELY GOOD.  ALSO LIKELY IN A WAR ZONE.


I know the OP is wordy, but it's not information-dense and if you just scroll down, heading by heading, you can quickly identify the portions to read in detail for the information you seek.  The bold and italics were presumably inserted to draw your attention to the key words and obfuscatory acronyms used.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #10 on: March 20, 2016, 10:36:58 AM »
You are paying 700 monetary units per month to rent a place you could buy outright for 11,000 monetary units? (16 months rent)

Mein Gott!  You need arithmetic lessons waaay more than reading if you think buying vs. renting is any kind of a debatable proposition.

But you asked for help with the reading part, so here goes..

From the OP, emphasis not mine.
DO A DOWN AND DIRTY QUICK ESTIMATE, CALCULATE THE GRM (Gross Rent Multiplier)

GRM = GROSS MONTHLY RENT DIVIDED BY PURCHASE PRICE

IF YOUR GRM IS:
<1   RUN
1   MINIMUM IF YOU EXPECT ANY CASH FLOW
2   CONSIDERED GOOD, THE STANDARD
2+    LIKELY GOOD.  ALSO LIKELY IN A WAR ZONE.


I know the OP is wordy, but it's not information-dense and if you just scroll down, heading by heading, you can quickly identify the portions to read in detail for the information you seek.  The bold and italics were presumably inserted to draw your attention to the key words and obfuscatory acronyms used.

thanks, I would have been a little more tactful, but that was the intent.  I was a bit wordy, but its intended for people just getting in (this info saved my a** multiple times), and the bold was intended to get to the meat of the article for others.

Bigsacks

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Re: Know your numbers, how to evaluate your next investment property
« Reply #11 on: March 20, 2016, 10:41:24 AM »
Oh, I took out the reference to my blog the other day, so as to not confuse my purpose.  I posted it here to be helpful, that's it.  I didn't know if it was too elementary or not.  I felt it would be informative to those starting out.

ahh....yea I missed that....thanks:)

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #12 on: March 20, 2016, 10:47:42 AM »
Oh, I took out the reference to my blog the other day, so as to not confuse my purpose.  I posted it here to be helpful, that's it.  I didn't know if it was too elementary or not.  I felt it would be informative to those starting out.

ahh....yea I missed that....thanks:)

ha ha ha ha...no problem.  Thoroughly enjoyed your post/breakdown.  Good stuff. 

sandandsun

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Re: Know your numbers, how to evaluate your next investment property
« Reply #13 on: March 20, 2016, 10:48:50 AM »
posting to follow- thinking of buying my first rental prop in the next year or two, want to have 2-3 within 5-7 years...

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #14 on: March 20, 2016, 10:51:57 AM »
posting to follow- thinking of buying my first rental prop in the next year or two, want to have 2-3 within 5-7 years...

You might be surprised at your progress.  I fortunately (to date) bought right, using the fundamentals.  After getting the first one going, the second came several months later, and the third a few months after that.  That has remained the pace. 

Good luck!!!!

bobechs

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Re: Know your numbers, how to evaluate your next investment property
« Reply #15 on: March 20, 2016, 10:54:31 AM »


thanks, I would have been a little more tactful, but that was the intent.  I was a bit wordy, but its intended for people just getting in (this info saved my a** multiple times), and the bold was intended to get to the meat of the article for others.

Not your fault man; laconic and cryptic are often conjoined twins in writing.  Consider the case of the original query, "What is GRM?" which I took as directed at the concept, not the words-behind-the letters.  Silly me.

I just can't imagine going to the trouble of writing and posting a long message re-asking, specifying the exact shortfall, in preference to reading the post.  Bold and italics is not exactly hiding the ball.

If you want to see lack of tact, just get me going.  I'm not going at all.  You wouldn't like me when I'm going.

sandandsun

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Re: Know your numbers, how to evaluate your next investment property
« Reply #16 on: March 20, 2016, 11:02:03 AM »
hope  you are right!  We bought a small place at the beach last year (older cottage, for the lot, not the house)- to hold as a building lot for retirement... fixed it up on a shoestring and listed with a prop manag. company to rent on a whim- didn't expect much, was just hoping to defray the taxes/ins but have been pleasantly surprised by demand...
Looking at retirement (or at least partial retirement) in 5-7 years - I've always wanted to manage a property and this vacation rental has really given me the bug :)  I like the upkeep/remodeling/physical work but hate dealing with people, so I liked that you had the management costs built in...
Thanks for the succinct breakdown- I've been reading a lot about evaluating a rental prop but this was a really nice post- calculations explained in detail and all in one place... thanks :)

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #17 on: March 20, 2016, 11:43:03 AM »
hope  you are right!  We bought a small place at the beach last year (older cottage, for the lot, not the house)- to hold as a building lot for retirement... fixed it up on a shoestring and listed with a prop manag. company to rent on a whim- didn't expect much, was just hoping to defray the taxes/ins but have been pleasantly surprised by demand...
Looking at retirement (or at least partial retirement) in 5-7 years - I've always wanted to manage a property and this vacation rental has really given me the bug :)  I like the upkeep/remodeling/physical work but hate dealing with people, so I liked that you had the management costs built in...
Thanks for the succinct breakdown- I've been reading a lot about evaluating a rental prop but this was a really nice post- calculations explained in detail and all in one place... thanks :)

Thanks so much for the comment.  I love hearing other peopleís stories and plans...itís really incredible what everyone is doing out there...thereís some very different approaches.

Like you, I also like doing a lot of the work myself, and take pride in it.  I think at some point soon, I will have grown to a point that I need to work ON as opposed to IN my ďbusiness.Ē 

Yours sounds like a great story, and a solid start.  I wish you all the best.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #18 on: March 20, 2016, 11:51:52 AM »


thanks, I would have been a little more tactful, but that was the intent.  I was a bit wordy, but its intended for people just getting in (this info saved my a** multiple times), and the bold was intended to get to the meat of the article for others.

Not your fault man; laconic and cryptic are often conjoined twins in writing.  Consider the case of the original query, "What is GRM?" which I took as directed at the concept, not the words-behind-the letters.  Silly me.

I just can't imagine going to the trouble of writing and posting a long message re-asking, specifying the exact shortfall, in preference to reading the post.  Bold and italics is not exactly hiding the ball.

If you want to see lack of tact, just get me going.  I'm not going at all.  You wouldn't like me when I'm going.

HAHAHAHA...I believe you!  Trust me.  I can definitely see you get to the meat of things.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #19 on: March 20, 2016, 12:00:52 PM »
I think what gets me most, the reason I posted this--is that there are quite a few people wanting to get in to real estate investing, see opportunities, and then guess, and jump in.   

That makes me sick.

These numbers are the absolute minimum you should be armed with, going in, to be able to carefully evaluate the financials.

There will always be a surprise.  Shame on you if you didnít see the obvious ones.  There are four or five more that will pop up.

You hope itís not with the numbers not working like you anticipated,

and you hope itís not structural. 

I was lucky enough to eventually stumble across all this information, and decided to put it all in one place.  Thereís more, but this is the nuts and bolts of it.
« Last Edit: March 20, 2016, 12:06:37 PM by PadAdventure »

Ankenystache

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Re: Know your numbers, how to evaluate your next investment property
« Reply #20 on: March 20, 2016, 12:09:06 PM »
Still trying to wrap my head around this GRM thing, I know its just a rough estimate and you should pencil it out first, but right now there is a duplex in my community. Asking price is 142,000, both units are rented getting 1,240 a month combined. So if I understand this right that would be 142,000/14880(1240x12)=9.54 GRM correct? and by the way it sounds am I correct in thinking that anything above a 2.5 is good money? If so how has this property not been swallowed up by someone yet?
As far as i know the structure is fine and it has decent appliances and is not in a high priced neighborhood but not in the slums also....
I probably am missing something so any comments would help.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #21 on: March 20, 2016, 12:15:04 PM »
Still trying to wrap my head around this GRM thing, I know its just a rough estimate and you should pencil it out first, but right now there is a duplex in my community. Asking price is 142,000, both units are rented getting 1,240 a month combined. So if I understand this right that would be 142,000/14880(1240x12)=9.54 GRM correct? and by the way it sounds am I correct in thinking that anything above a 2.5 is good money? If so how has this property not been swallowed up by someone yet?
As far as i know the structure is fine and it has decent appliances and is not in a high priced neighborhood but not in the slums also....
I probably am missing something so any comments would help.

The GRM uses the monthly GROSS rent.  Not annual.  Thatís why the numbers are astronomical.  Youíre still looking at 1.75 (1240 each?), which is pretty good, look at the other results and youíll see how itíll really perform (theoretically)

(if itís 1240 total, it would have to be a spectacular property that I didnít mind partially paying for, and housed a coin operated laundromat.  the GRM would be less than 1.)

check on what it will actually rent for as well.  Donít trust the listing.  I can rent a dump out all day long for 600/month, depends where you are.

If itís in a decent area, and the other numbers work, you may well have a winner.

I invest in tougher areas for cash flow, so in the mid oneís I would avoid, not worth the extra hassle.  But again, depending on the other factors, that might be a good buy.
« Last Edit: March 20, 2016, 12:29:53 PM by PadAdventure »

Ankenystache

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Re: Know your numbers, how to evaluate your next investment property
« Reply #22 on: March 20, 2016, 12:50:19 PM »
Thanks again, the rent is 1240 total a month for both units, I have thought about living in one half and renting the other half to help offset cost but like I said its not in a great area, but there are a lot worse. I think if I do decide to pull the trigger I will follow your advice and offer a ridiculously low offer, worst they can say is No right?... But again thanks I figured out what I was doing wrong. It is a nice way to get a quick figure so that you dont waste a lot of time on a property but like you said also, there is a lot more you have to figure in when looking at spending your investment money.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #23 on: March 20, 2016, 01:20:03 PM »
Thanks again, the rent is 1240 total a month for both units, I have thought about living in one half and renting the other half to help offset cost but like I said its not in a great area, but there are a lot worse. I think if I do decide to pull the trigger I will follow your advice and offer a ridiculously low offer, worst they can say is No right?... But again thanks I figured out what I was doing wrong. It is a nice way to get a quick figure so that you dont waste a lot of time on a property but like you said also, there is a lot more you have to figure in when looking at spending your investment money.

Great point. 

Like I said, if youíre not embarrassed by your offer with investment properties, youíre offering too much. 

I know I have started to try to make things work in the past, and fortunately I passed on them. 

Something will come along.  Youíll analyze a bunch, make offers on a few, and find the one.

Scandium

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Re: Know your numbers, how to evaluate your next investment property
« Reply #24 on: March 21, 2016, 02:52:22 PM »
Gross Rent Multiplier.  I put it in italics next to the formula.  Itís hard to see though.  2.69 is awesome.  My best are around that.  My big producer is 3 exactly, as expected, itís a POS, but blue collar area, rents quick and Iím not dodging bullets when it comes to collecting rent.  Close, but itís a 3.

Would have helped massively if you stated GRM is percent!

As it is now it's confusing. Just saying GRM is Rent/price and should be 2 don't work. So $1000/month, sells for $100k: GRM = 0.01. Yes 1%, but you didn't say that. Then I would have know this is just the 2% rule I've heard before, which don't work for crap around here. SFH are $300k+, rent maybe $2k..

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #25 on: March 21, 2016, 03:03:40 PM »
Gross Rent Multiplier.  I put it in italics next to the formula.  Itís hard to see though.  2.69 is awesome.  My best are around that.  My big producer is 3 exactly, as expected, itís a POS, but blue collar area, rents quick and Iím not dodging bullets when it comes to collecting rent.  Close, but itís a 3.

Would have helped massively if you stated GRM is percent!

As it is now it's confusing. Just saying GRM is Rent/price and should be 2 don't work. So $1000/month, sells for $100k: GRM = 0.01. Yes 1%, but you didn't say that. Then I would have know this is just the 2% rule I've heard before, which don't work for crap around here. SFH are $300k+, rent maybe $2k..

Yes, it's percent, but what would you rather I said? 

The correct industry term? 

or "calculate the percentage of total rent to purchase price?"  I assume the latter would make more sense, and I could have been clearer, so I appreciate the input.

it is hard to get in some areas, no doubt, and they may still be a good investment.  Just maybe not for cash flow, which I stipulated.

The GRM deals almost exclusively with a subject properties ability or potential to cash flow.

the "caveat" section was an attempt to describe the fact that other factors might need to be considered.

apologize for the confusion.  Thanks again.
« Last Edit: March 21, 2016, 03:11:23 PM by PadAdventure »

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #26 on: March 21, 2016, 03:09:03 PM »
Gross Rent Multiplier.  I put it in italics next to the formula.  Itís hard to see though.  2.69 is awesome.  My best are around that.  My big producer is 3 exactly, as expected, itís a POS, but blue collar area, rents quick and Iím not dodging bullets when it comes to collecting rent.  Close, but itís a 3.

Would have helped massively if you stated GRM is percent!

As it is now it's confusing. Just saying GRM is Rent/price and should be 2 don't work. So $1000/month, sells for $100k: GRM = 0.01. Yes 1%, but you didn't say that. Then I would have know this is just the 2% rule I've heard before, which don't work for crap around here. SFH are $300k+, rent maybe $2k..

if it makes it any better, I updated the original post, to make you look bad (just kidding)...to clarify the point.

I appreciate the catch.

Another Reader

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Re: Know your numbers, how to evaluate your next investment property
« Reply #27 on: March 21, 2016, 04:35:36 PM »
Gross rent multiplier is defined as the ratio of the asking or sales price to the gross anticipated annual rent.    For multiple units with laundry facilities, that income is included in some but not all definitions.  I was surprised to see wikipedia using monthly income, because that is not common in my experience.  GRM can be PGRM, using potential gross income, or EGRM, using effective gross income, which is potential gross less vacancy and collection loss.

GRM's are useful rules of thumb for properties that are expected to have similar percentages of expenses.  For example, all single story four-plexes with open parking in a certain area will generally experience expenses within a narrow percentage range.  Rather than do a full capitalization rate analysis, the GRM derived from similar sales can help you decide if the specific four-plex with open parking you happened on is likely reasonably priced.

You can also use the GRM to estimate the value of a property if you know the anticipated gross income.  If the property generates $10,000 a year in gross rental income and the GRM's for that property type in that area are around 9, then the property is likely worth around $90,000.

If you have a house priced at $100,000 that generates $1,000 a month in gross rent, the GRM is 8.33 ($100,000/$12,000).  That house meets the 1 percent rule as well.  It rents for 1 percent of the asking price.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #28 on: March 21, 2016, 06:49:53 PM »
Gross rent multiplier is defined as the ratio of the asking or sales price to the gross anticipated annual rent.    For multiple units with laundry facilities, that income is included in some but not all definitions.  I was surprised to see wikipedia using monthly income, because that is not common in my experience.  GRM can be PGRM, using potential gross income, or EGRM, using effective gross income, which is potential gross less vacancy and collection loss.

GRM's are useful rules of thumb for properties that are expected to have similar percentages of expenses.  For example, all single story four-plexes with open parking in a certain area will generally experience expenses within a narrow percentage range.  Rather than do a full capitalization rate analysis, the GRM derived from similar sales can help you decide if the specific four-plex with open parking you happened on is likely reasonably priced.

You can also use the GRM to estimate the value of a property if you know the anticipated gross income.  If the property generates $10,000 a year in gross rental income and the GRM's for that property type in that area are around 9, then the property is likely worth around $90,000.

If you have a house priced at $100,000 that generates $1,000 a month in gross rent, the GRM is 8.33 ($100,000/$12,000).  That house meets the 1 percent rule as well.  It rents for 1 percent of the asking price.

Great info, and very in depth.  I think from experience however, that the final example you described isnít the typical computation one assumes with the GRM/2% rule.  If that were the case, the property I quoted would be a GRM of 36!!!

I was always taught the GRM method I posted, and it works in the real world for me, as a percent, quick estimate.  In the areas I invest,  the house you quoted at 8.33 would be a 1.  And I would be smart in recognizing it as a bad deal  (might be good in a good to great upcoming area).  an 8+ wouldnít only be a unicorn, it would be fantasy.

Maybe I have been mistaken.  But no matter what you call it, the computation in my post has worked for me, again as a rough estimate, without fail. 

Your post was really insightful and well researched or experienced though, so itís hard to not be intrigued by it. 

Thanks for adding some value to this conversation, I like it.

Thatís why I frequent here, thereís some smart Mofoís on this site...we all benefit.
« Last Edit: March 21, 2016, 06:52:49 PM by PadAdventure »

joe7886

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Re: Know your numbers, how to evaluate your next investment property
« Reply #29 on: March 23, 2016, 04:33:07 PM »
Hi,

I'm a newbie thinking of buying a 3 family and moving into one of the units. How does this factor in the formulas of whether it's a good buy or not? On one hand, I lose a unit's rent, but I also stop paying rent and can maybe live for "free" if I find the right property. Do I treat rent saved as rental income?

Thanks

BookWorm22

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Re: Know your numbers, how to evaluate your next investment property
« Reply #30 on: March 23, 2016, 06:29:35 PM »
posting to follow

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #31 on: March 23, 2016, 09:07:05 PM »
Hi,

I'm a newbie thinking of buying a 3 family and moving into one of the units. How does this factor in the formulas of whether it's a good buy or not? On one hand, I lose a unit's rent, but I also stop paying rent and can maybe live for "free" if I find the right property. Do I treat rent saved as rental income?

Thanks

of course!  you can always house hack, and rent later! 

futurehermit

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Re: Know your numbers, how to evaluate your next investment property
« Reply #32 on: March 27, 2016, 05:18:00 AM »
Thank you for sharing your knowledge with others.  I found it pretty straight-forward and helpful for someone who knows nothing about rentals except that one can either lose or make money.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #33 on: March 27, 2016, 08:26:53 AM »
Thank you for sharing your knowledge with others.  I found it pretty straight-forward and helpful for someone who knows nothing about rentals except that one can either lose or make money.

Thanks for the comment! 

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #34 on: April 10, 2016, 04:36:35 PM »
Gross Rent Multiplier.  I put it in italics next to the formula.  Itís hard to see though.  2.69 is awesome.  My best are around that.  My big producer is 3 exactly, as expected, itís a POS, but blue collar area, rents quick and Iím not dodging bullets when it comes to collecting rent.  Close, but itís a 3.

Would have helped massively if you stated GRM is percent!

As it is now it's confusing. Just saying GRM is Rent/price and should be 2 don't work. So $1000/month, sells for $100k: GRM = 0.01. Yes 1%, but you didn't say that. Then I would have know this is just the 2% rule I've heard before, which don't work for crap around here. SFH are $300k+, rent maybe $2k..

Clarified in original post.  Could have made it clearer.  Thanks for the catch.

beardsly

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Re: Know your numbers, how to evaluate your next investment property
« Reply #35 on: April 14, 2016, 02:07:51 PM »
I don't find the "GRM" calculation useful as it does not take into account expenses which can vary widely. 
A successful rental property mainly depends on cashflow plain and simple.  Income minus expenses.  I agree with the other points about being honest with yourself about future repairs, vacancy and other expenses.

I just use a simple ROI calculation when calculating if a property is worth purchasing.  If I invest x'$ for down payment, closing costs, repairs etc, I target at least 20% ROI.  So for example if I invested $25k in a property (that I could have otherwise invested in the stock market) I would like to have at least $5k in cashflow each year.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #36 on: April 14, 2016, 09:06:33 PM »
I don't find the "GRM" calculation useful as it does not take into account expenses which can vary widely. 
A successful rental property mainly depends on cashflow plain and simple.  Income minus expenses.  I agree with the other points about being honest with yourself about future repairs, vacancy and other expenses.

I just use a simple ROI calculation when calculating if a property is worth purchasing.  If I invest x'$ for down payment, closing costs, repairs etc, I target at least 20% ROI.  So for example if I invested $25k in a property (that I could have otherwise invested in the stock market) I would like to have at least $5k in cashflow each year.

the GRM isnít perfect, doesnít claim to be.  the GRM is a quick estimate...1 min, to decide if you want to know anything else, or move on.  All the other calculations are the in depth evaluation of a property

The GRM is the down and dirty, if it doesnít pass...itís not worth doing anything else.  If it does, you still have to do your due diligence to see if itís a performer.

Mr.GrowingMustache

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Re: Know your numbers, how to evaluate your next investment property
« Reply #37 on: April 15, 2016, 12:00:18 PM »
So if I am getting this correctly....

GRM = (Total Monthly Rent)/(Total Home Price)

You do make it confusing, it would have been clearer with better formatting and more clearly indicating the formulas. You also don't indicate what is Gross Monthly Rent.


Ok so I have a house, that I am thinking of selling or renting. I think I can get $200k for it, currently I owe $170k on the mortgage. I can refinance and put down $20k.

My question is, if i refinance, and get a $150k loan, and I can rent it for $1600 a month, is it worth it?

should I look at it like     GRM = 1600/200000 = 0.8%
or                                 GRM = 1600/150000 = 1.07%

Also here in NJ, renting for income seems pretty prohibitive with the high taxes and home prices.

PadAdventure

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Re: Know your numbers, how to evaluate your next investment property
« Reply #38 on: April 15, 2016, 12:21:00 PM »
So if I am getting this correctly....

GRM = (Total Monthly Rent)/(Total Home Price)

You do make it confusing, it would have been clearer with better formatting and more clearly indicating the formulas. You also don't indicate what is Gross Monthly Rent.


Ok so I have a house, that I am thinking of selling or renting. I think I can get $200k for it, currently I owe $170k on the mortgage. I can refinance and put down $20k.

My question is, if i refinance, and get a $150k loan, and I can rent it for $1600 a month, is it worth it?

should I look at it like     GRM = 1600/200000 = 0.8%
or                                 GRM = 1600/150000 = 1.07%

Also here in NJ, renting for income seems pretty prohibitive with the high taxes and home prices.

I figured I did not need to spell out what gross monthly rent was, as it's defined by its title

Gross - DEF.  (of income, profit, or interest) without deduction of tax or other contributions; total.
Monthly
Rent

The deal you stated would probably cost you per month, during a good month.  If it were worth holding on to for the long term appreciation or some other future benefit, than maybe.  I would pass if it were me.  The benefits seem to all require time and luck to fully develop. 

The formatting was done like that so it wouldn't be a big block of text.  I was hoping it would be easier

thanks for the advice, and good luck with your decision!

K-ice

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Re: Know your numbers, how to evaluate your next investment property
« Reply #39 on: April 29, 2016, 07:41:42 AM »
Hi,

I'm a newbie thinking of buying a 3 family and moving into one of the units. How does this factor in the formulas of whether it's a good buy or not? On one hand, I lose a unit's rent, but I also stop paying rent and can maybe live for "free" if I find the right property. Do I treat rent saved as rental income?

Thanks

It is hard to live for "free" but not impossible.

There are 2 things I would look (have looked) for in your situation.


1) if you rented the whole thing would the numbers still work?
Be sure it is cash flow positive if you didn't live there.

2) calculate your shortfall (income from 2 units - expenses)
Is that shortfall less that your current living expenses?

Look at those 2 points, if you're not happy with both of them I would keep house hunting.

As a rule of thumb when the bank calculated if the could afford the mortgage they took our regular salery income plus the (rental income)/2.

I was dissapounted since cutting the rental income in half hurt my initial estimates.

But I guess they do that to quickly account for tax, vacancy etc.