One of the most common methods of evaluating a purchase in commercial and residential real estate investment is cash flow. In commercial real estate you will often here everyone talk about the cap rates. In residential real estate a common one is the gross rent multiplier (GRM).
To calculate GRM:
* Estimated (or known) rent x 12 months = Annual Rent
* Asking price (or what you plan to pay for it)
* GRM = Asking Price / Annual Rent.
For example, if your monthly rent is $1,000, and the asking price is $100,000 your GRM is:
$100,000 / $12,000 = 8.33.
The basic rule of thumb is that you need a GRM of 10 or less to have decent cash flow. This is based on the assumption that your operating expenses are less than 40% of your monthly rent. Operating expenses include your property manager, taxes, insurance, and maintenance and repairs. It also assumes that your financing costs do not exceed 60% of your monthly rental income.
It is not a comprehensive evaluation tool, but it is a quick guide!! It looks at and considers one years worth of income only too!!
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If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
One of the most common methods of evaluating a purchase in commercial and residential real estate investment is cash flow. In commercial real estate you will often here everyone talk about the cap rates. In residential real estate a common one is the gross rent multiplier (GRM).
To calculate GRM:
* Estimated (or known) rent x 12 months = Annual Rent
* Asking price (or what you plan to pay for it)
* GRM = Asking Price / Annual Rent.
For example, if your monthly rent is $1,000, and the asking price is $100,000 your GRM is:
$100,000 / $12,000 = 8.33.
The basic rule of thumb is that you need a GRM of 10 or less to have decent cash flow. This is based on the assumption that your operating expenses are less than 40% of your monthly rent. Operating expenses include your property manager, taxes, insurance, and maintenance and repairs. It also assumes that your financing costs do not exceed 60% of your monthly rental income.
It is not a comprehensive evaluation tool, but it is a quick guide!! It looks at and considers one years worth of income only too!!
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125