Investing in Real Estate, It's All About The Numbers

By
Real Estate Agent with Coleman Real Estate LLC

There are different ways to do a quick analysis of investment properties. When in the initial search process you can use the GRM (Gross Rent Multiplier) method to start narrowing down properties. The GRM is a rough value. Do not rely on this to make your offer. Here is the process:

If you know the GRM, multiply in by the annual gross rent of the property you are evaluating and this will give you a rough estimate of value. So if you know the annual gross rent of a property is 35,000 and the GRM is 10, $35,000 x 10 = $350,000

Value = Annual Gross Rents X Gross Rent Multiplier

But what if you don't know the GRM? This is when working with a REALTOR is very beneficial. Have a REALTOR get you a report on listings similar to the properties you are interested in. Once you have those take the selling price and divide it by the annual gross rental income. So if a property has a selling price of $350,000 and an annual gross rental income of $35,000, the GRM is 10.

GRM = Sales Price / Annual Gross Rents

Sellers generally try to sell their properties at the highest possible GRM for that market. Buyers typically try to purchase investment properties at the lowest possible GRM for that market. The beauty of this initial process is you don't have to visit the property to get this rough value. The numbers have to make sense. When the numbers make sense then it's time to found out the real income figures. To get the real income figures you must find out the prior years rental income which takes into account uncollected rents and vacancies. Subtract all operating expense including taxes to get the properties real income.

 TAFN

Comments (1)

Bill Exeter
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert

Hi Tellis,

You are so right.  Investors too often get caught up in emotional decisions and forget that investment property has to be valued based on cash flow - nothing more.  You can adjust the value based on other factors, but must leave emotion at the table.

Dec 24, 2007 04:25 AM