Base your analysis on the actual numbers and not future numbers. Ask for a rent roll and operating expenses report from the owner. Then, cross check this information with the actual leases for the units. Delve into the information that the owner gives you and make comparisons with other properties, insurance rates, property taxes, service and repair companies, property management costs and so on.
- Cost Per Unit – compare the cost of each unit in an apartment complex or building
- Square Footage – cost of property divided by square footage (not all space is created equal, square footage of an attic is not the same as a basement or a garage let’s say)
- Gross Rent Multipliers – cost of property divided by cash flow from rent minus expenses
- Opportunities For More Value (conversion or additions; parking, laundry services, and other amenities)
TIP: Is this an area that is already overrun with investors? Seek out a market that's not saturated with investors. Locals know best. As you grow your network, friends in communities around the United States will become a key aspect of your research, alerting you to new properties and changes in communities. Local newspapers and agents can also facilitate your research. For example, telling you if there's a new development in the works right near where you want to buy property.
The biggest change of late is the usefulness of the Internet in doing research, and especially in real estate. Now, it's more of a level playing field, real estate agents don't hold all the cards. You as the investor, can do more research on your own.
Formulas to Determine Value:
Capitalization Rate = net operating income / purchase price.
Net operating income – deduct expenses from income (total rents, parking, laundry…)
So if an apartment complex costs $400,000 and earns a Net income of $50,000, then the equation is: $50,000/$400,000= 12.5%
True Property Value = total operating income / capitalization rate.
So we take the net operating income of $50,000 and divide that by the capitalization rate of 12.5%, the equation is: $50,000/12.5=$400,000
Gross Rent Multiplier - GRM
Property value divided by the gross income = GRM (Gross Rent Multiplier)
So if the total cost of the property was sold for $600,000 and the gross income is $75,000, the equation is: $600,000/$75,000= GRM of 8
To determine market value, to gauge what a property should be listed for. You can use this formula, gross rent multiplier x annual income of the property. For instance, the GRM is 8 and then the income is $57,000. The equation is: 8 x $57,000=$456,000
House P/E Ratio= House price /rent (market rent) - expenses
How much are you making, what is your cash flow? Subtract the net operating income by the loan payment.
Determine percentage of profit you’ve made on a sale of a property:
Property sold for $300,000; originally you bought the property for $225,000. Divide the profit by the purchase price. The equation is: $75,000/$225,000=.33 or 33% profit.
Return on Invesmtent (ROI)
It’s good idea to gauge how your investment is doing once a year. Determine if it’s worth keeping or selling or figuring out ways to gain more value from the property. The return divided by the investment and times 100 gives you a rough ROI.
Return (rental income) / Investment x 100 = ROI
Say you bought a house for 150,000 in cash and earn $8,000 in rent each year, your ROI formula would be:
$8,000 / $150,000 x 100 = 5.3% (That’s your return each year).
TIP: When looking a comparable home sales, remember that if the market is change rapidly, then there's a delay for some of the sale numbers since it takes time for the sales to actually close and get recorded. So homes could have sold for less three weeks ago then they are today or vice versa--homes selling for more. Just something to consider if the market is influx and changing at a rapid rate.
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