Posted by Frank Chin on September 05, 2003 at 07:49:41:
I left something out, but its not the interest rate, its the down payment
The GRM of 6 is based on a down payment of 20%. I was an active buyer of 3 family properties when the interest rate was 10%. No longer, as those properties in good areas no longer cash flow.
In doing the analysis, I take into account:
- Interest of 10% at the time.
- Expenses: PITI, heat, utilities, maintenance 35% on the RR
- Vacancies 10% of RR
- Down payment of 20%
So for a 180K property, 30K/year RR
Interest…$14,400 (10% of 144K mortgage)
Expenses…$10,500 (35% of $30,000)
Vacancy…$3,000 (10% of $30,000)
Note: There is a slight positive cash flow - but don’t forget principal amortization.
I developed these ratios after looking at a dozen properties, as the ratio of expenses to rent roll for a particular type property tends to be quite constant.
After the first dozen, I use the GRM to screen so I don’t have to do a spreadsheet while I’m on the phone. Of course, one gets the actual numbers after property inspection, and take into account other factors such as the condition of the building.
But the GRM gives me a good initial indication whether it will cash flow.
As an update, at 6% interest rate, GRM’s for such properties now exceed 15 in good areas. At this level, they don’t cash flow.