Determine if that property is worth purchasing.
There are many ways to determine if you want to pursue purchasing a property. The one most talked about is the Cap Rate. I have always had an issue with using the Cap Rate method. There are too many variables. Least of which is Cap Rate has you paying all cash for the property! We prefer your use of the leverage principle when purchasing real estate.
My favorite way is one I learned from a very wealthy older man I met back in the 70’s. He owned many apartment buildings back then. The largest was a complex of a little over 300 units. I was at his home early one Thanksgiving Day doing some emergency plumbing. Down in his basement was a scale model of this large set of units.
I asked him how he ever got to own such a large set of properties and he shared his down and dirty formula with me.
It is the Gross Rent Multiplier or GRM for short. He said he used it from the very beginning when he first starting investing in 2-4 unit properties. He showed me how to calculate the formula and I have used it ever since.
The GRM is a rough rule-of-thumb way to figure out a quickie appraisal of sorts. I use it to determine whether I want to pursue purchasing any building. It works here in San Diego and I have used it everywhere else in the country. Heck, it works anywhere in the world for that matter.
If the asking price and the rents are about market or below the average GRM for the area then it has my attention. Let’s say the current Gross Rent Multiplier for 2-4 unit buildings in Escondido is 14. If I find a building there listed at 12 or 13 then I am interested.
The formula for getting the GRM is to take the total monthly rents times 12 months. Then divide the asking price by that amount.
An example is of a 4 unit building currently listed for $1,100,000. It has monthly rents of $7,000. $7,000 times 12 months equals $84,000 annual gross rent. Divide the list price of $1,100,000 by $84,000 and you get a GRM of 13.09.
You also have to look at other factors:
Age of the building
MechanicalsBed and Bath Configurations
Upgrades
Location
And of course, are there cost-effective options to make rent increases?
We would like to share this formula with you.
Below you can download our handy Gross Rent Multiplier Worksheet for free. It allows you to plug in the rents and figure the GRM for any property you will ever consider.
Knowing the GRM of any area is key to using this formula. It is easy to get. Plug in the SOLD prices of comparable properties with their existing rents. When possible use sold listings that have closed within the last 6 months.
Want help analyzing your building’s GRM? How about help determining what your next best investment should be. Call us today to schedule your strategic marketing consultation. 858-218-4511
Get the Link to the
