With real estate leasing going strong in many parts of the nation, you may be considering getting into Real Estate Investing. In this blog, I’ll describe some of the basic terminology.
All examples will be based upon a $100,000 purchase price, $1,000 a month rent, $300 a month operating expenses, and a $450 a month mortgage.
Gross Rent Multiplier
GRM is used to describe a ratio between the cost of a property and the anticipated rental rate. It calculated by dividing the purchase price of the property by the monthly rent. In our example, we would use $100,000 / 1,000 to arrive at a GRM of 10. The higher the number is the better.
Net Operating Income
Net Operating Income is the total cost of the property excluding any mortgage. It’s calculated by adding up all the operating expenses including taxes, insurance, management fees, leasing fees, maintenance, and HOA dues. The total monthly costs are $300 and the monthly rent is $1,000. We would use $1,000 - $300 to arrive at a Net Operating Income of $700. Use $700 * 12 to arrive at an Annual Net Operating Income of $8,400
Capitalization Rate
The Capitalization rate is a ratio between the Net Operating Income and either the original or current market value of a property. We would use $8,400 / $100,000 to arrive at an annual Capitalization Rate of 8.4 percent.
Cash Flow
Cash Flow is the movement of cash in and out of the property. Positive cash flow is usually the goal. It is calculated by subtracting the Net Operating Income and any existing debt from the Gross Income. We would use $1000 – ($300 + $450) to arrive at a monthly Cash Flow of $250.
Occupancy Rate
Occupancy Rate is the ratio between the amount of time a property is rented and the amount of time is vacant. If there is no actual data, I usually use 90 percent as a starting point for analyzing a property.
Knowing the basic terminology and how to calculate them is essential to evaluating any real estate investment purchase.
Looking to purchase investment properties in the North Dallas area? Contact us! We have the experience and knowledge to find good investment properties, lease them to suitable tenants, and provide on-going property management if needed.
Source: http://www.thebranchteam.com/wordpress/2011/08/13/basic-real-estate-investing-terminology/
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