rental property rule of thumb??? - Posted by mike-nj

Posted by IB (NJ) on January 12, 2004 at 11:53:43:


rental property rule of thumb??? - Posted by mike-nj

Posted by mike-nj on January 11, 2004 at 13:21:54:

I am considering purchasing a rental property. i was talking with my cpa and he believes the purchase price is too much for the property. he said the maximum offer i should make on the property is 5 times the yearly gross income. the property’s asking price is 7 times the yearly gross rental income.

what rules of the do other investors in this forum use when making offers for rental property’s?

Re: rental property rule of thumb??? - Posted by GL(ON)

Posted by GL(ON) on January 11, 2004 at 14:48:34:

Your accountant is talking about the GRM or Gross Rent Multiplier. This is a good rule of thumb but not the way he uses it.

The break even point is around 6.5. Below that is usually positive cash flow, above usually negative. Today you can get a pos cash flow with a higher GRM because of low interest rates.

This is only a quick filter, what you want to use is the cap rate or Capitalisation Rate. This is the purchase price divided by the net income. Usually cap rates are around 10 or 12 but with interest rates being so low, this is under pressure too.

If you do an archive search you will find some interesting discussions of Cap Rate and GRM. I’m not sure what year, try 2003 and 2002.

Re: rental property rule of thumb??? - Posted by BC

Posted by BC on January 11, 2004 at 13:33:01:

My goal is to get 1% of the purchase price each month as rent. This is for single family houses with the tenants paying their own utilities. For example if I pay $150,000 for a house, I would be happy with $1,500 per month rent. Sometimes I have to settle for a little bit lower.


So then… - Posted by IB (NJ)

Posted by IB (NJ) on January 12, 2004 at 24:27:08:

if an investor was viewing the property and desired a cap rate of 11, would he multiply that times the NOI to get the max offer he/she should make on the commercial property?

I’m asking because I’m looking at a 6 unit building headed to foreclosure. Only one unit is occupied and the owners have died (buying from heirs). I can pretty much estimate what the income (sec. 8) and expenses will be. How would I determine my max. offer price on this property?

Thanks GL.

Re: rental property rule of thumb??? - Posted by lemonsensation

Posted by lemonsensation on January 11, 2004 at 22:32:12:

that would be a really good deal.

p.s. this is my first post. is it safe to put my actual email address where it asks for my email? I don’t want to get a ton of spam.

Re: So then… - Posted by GL(ON)

Posted by GL(ON) on January 12, 2004 at 08:15:23:

If you required a cap rate of 11% then you would multiply the NOI by the reciprocal of 11 to get your maximum offer. That means, divide 11 into 100 and you get 9. The reciprocal of 11 is 9 so multiply the NOI by 9 to get your max offer.

The reciprocal of 12 is 8 (and vice versa) the reciprocal of 10 is 10.

You could also factor in things like closing costs and repairs and renovation.

In a case like you mention where the building is run down and has a high vacancy factor you must work that into your calculations. How much will it cost to put the place back in commission? For renovations and also the inevitable vacancy loss as you fill it up.

Say you estimate it will cost $25000 to put the place in shape and that it will take 6 months to do the work and attract new quality tenants. Take 6 months rent and $25000 and deduct from your max price. In fact you should do better than that to make it worth your time and trouble.

Remember too that a building like that will be hard to sell, hard to finance and possibly hard to insure. This should not scare you away if you are prepared to do the work (for the right price) but it will scare away most people. If you are the only one bidding, and they don’t want the place (notice how little they care about keeping it up) then you should be able to write your own ticket.

If they have big delusions of grandeur then all you can do is say goodbye, and go on to the next deal. Make sure you tell them to call you if they change their minds. If they do call, go buy the place… at a better price.

Re: rental property rule of thumb??? - Posted by carrie

Posted by carrie on January 12, 2004 at 09:14:03:

I always use my real adrress and don’t get a ton of spam. It helps if someone here wants to email you personally.
Also - Welcome to the board!