At what point do you want to look at CAP rates and Gross Rent Multiplier when looking to purchase rental property? Any rental? 2-4 units? 5+ units? Commercial?
Thanks.
Personally, I never look at cap rate. I think it’s just a big joke.
Mike
That was kind of my take on it. It just doesn’t make sense. Not the formula, but the need. I always thought, if the numbers work… But who am I, I’ve only owned one 2 unit and didn’t even know about CAPS and GRM at the time.
Any seasoned vets who DO use and why it’s a good idea? At what level?
I am just starting out, but if the GRM is shown, I look for a range of 3.25 - 4.24. I believe other, more “seasoned investors” use 50 times gross monthly rents.
I just take the true net annual operating income of a property (apartment buildings), add the debt service cost back in, and multiply this total by 9 to get a ball pack of what the appraisal will be. Then I take 80% of this figure minus the estimated repair costs to arrive at the highest purchase price that I want to pay.
I have run the numbers through all sorts of appraisal software and punched it in by hand using standard real estate valuation formulas, but the simple formula above gets me in the ball park.
That way I can run the numbers as soon as I see the income statement on a property and make a decision to look closer or go to the next deal.
That formula is for older existing property. Different formula for new construction is used, but I can make more buying older properties.