When investing in an income producing property, what gross rent multiplier do you guys use to get a general idea if its a good deal or not. Also, what cap rate do you look to achieve. I’m looking for ways to get a quick status of an investment property to see if its worth pursuing.
The cap rates have come way down since interest rates have fallen so low. You used to be able to find plenty of good 10 cap properties in good locations and 12 to 15 caps in low income areas. Today you will find an average of about 8 I believe. GRM too have changed. The best thing to do is to look at several properties and compare the price per unit and GRM and cal rates to come up with an average. If you find something that you thik is a good deal check it out to see why the price is so low. Is it 50 5 vacant or have chilled water or all bills paid. If it looks great then grab it fast.
Ted’s got the right idea – do some homework. Cap rates have fallen; in fact in many instances they are too low. The only way some of these folks (buyers) are going to come out ahead is with some form of subsidized program (care of the Feds) or with a tremendous upward movement in valuations. Care to place your bet?
Both of these things have happened in the past and they will again. But the point is will they happen on schedule (when and where) you need them to? Is that what passes for investing these days?
Personally, I like to own things long term. I hate to sell, but when cap rates are this low and the crowd is so anxious for product – I can’t really help myself. The profits are just too good.
Let me say it another way – just the fact that I am selling at all should be a warning sign (of sorts).
Sooner or later everyone (and their bankers) will wake up to the fact that there really aren’t that many well located properties that make profit for their owners year in and year out. Or owners who know how to run them – but that’s another story.
As I said, Ted’s got the right idea. Wherever you are, begin doing some digging. If nothing else, the practice of going through the due diligence process will teach you a lot about yourself, other people and what truly makes a good deal.
PS - one good thing about today’s market – aside from the temporary aberation in interest rates – is the fact that there are a LOT of properties for sale. And while I don’t entirely subscribe to the theory that this is simply a numbers game (don’t shotgun offers all over the place), there is some truth to the fact that great deals often come disguised as mediocre ones. It’s only through the discovery process that these are revealed for what they are. Think of the due diligence process as your (modern day) version of a old-time California gold miner’s pick and shovel. It still took a great deal of work (and a little luck) for most to become wealthy.
Oh, and one more thing – a lot of money was made by the folks selling picks and shovels too. Don’t forget that. Costs always matter.
Cool reply Eric. I too have found prices too high especially here in Austin. My dads company just closed on 2 projects in Round Rock and they used a non profit company to get property taxes abated and got govt loans or assumed them. They are both really nice properties well located but have to offer rent discounts and special deals to low income. A lot of paper work etc but at that level it would be worth it. I believe the taxes would be $500,000 per year. I was not involved in the deal do I do not know their cap rate or what they even paid but like you said the Fed’s and local govt are making it work.
I have been looking at a lot of apts and even junk with chilled water and a big fence is selling for high dollar. Wish i had some Monolopy Money. A super rehab possibility but just too expensive.
These are kind of basic questions and are not just real estae but could be other type of investment terms. No problem helping however.
Gross rent multiplier is a multiple times the gross rent to come up with the value. A house that rents for a grand a month would have an anual rent of $12,000 and a gross rent multilpe of 5 would give you a value of $60,000. Used a lot in apartments to help quickly compare one property to another.
Cap rate or capitalization rate also compares the value or price of buildings and other investments. The net operating income divided by the price will give you the cap rate. Appraisers use it to figure the value once given the net operating income and the industry average cap rate at a given time they can give you the value of the building or the income stream from that building or any other income. Hope this rambling helps some. Putting stuff into words is kind of hard for me sometimes. You may look at this web site glossary too for more info on the subjects
Good luck and thank you,
Ted P. Stokely Jr
11505 Sw Oaks
Austin, Texas 78737
Be careful using the gross rent multiplier. It’s useful for analyzing a lot of deal quickly (primarily apartment buildings where the expense ratios tend to be fairly consistent.)
The GRM doesn’t tell you the whole story - vacancy, credit loss, and total operating expenses, etc. But if you want to use it, try taking 3 different properties and performing an income/expense analysis on them using your target return requirements. For example , what kind of cash on cash return do you want?
Then work backwards to a gross rent multiplier that supports your financial targets. Then you’ll know the right one to use for your personal goals.