Real Estate Calculations for Rental “Buy and Hold” Real Estate :

GROSS RENT MULTIPLIER

How is it calculated?

Price for Rental Property / Gross Total Rents = GROSS RENT MULTIPLIER

Example :

$1,000,000 rental property price / $150,000 in gross rents collected = 6.67 Gross Rent Multiplier (GRM)

When is it used?

This calculation is great to use as an initial calculation to determine whether the building being offered is a good deal in the marketplace. Assuming you understand the GRM in your market (let’s say 8), then you can also flip the calculation to assume a fair market price for any rental property.  For example :

8 GRM x (4 unit building at $1000/mo rent or $48K/year collected) = $384,000 would be a fair price

Limitations with GRM Calculation :

Very limiting as it provides only a snapshot of a property’s performance based upon rents collected ALONE.  GRM values can fluctuate based upon the market as well.  So, I recommend this calculation only be used on initial valuation.

CAP RATE

How is it calculated?

Net Operating Income of Rental Property / Purchase Price of Rental Property = Capitalization Rate %

Example :

$65,000 Net Operating Income / $810,000 Purchase Price of Rental Property = 8.02% Cap Rate

What is Net Operating Income Defined as?

Use the acronym : VIMTUM

Vacancy : 3-10% of annual collected rents

Insurance : Get a quote from a qualified insurance agent

Maintainance : Typically 5-15% of gross collected rents

Taxes : Property Taxes on Your Property

Utilities : This can be electric, water, gas, and potentially a cable or internet bill

Management : Property management can 5-10% of gross collected rents

Note, this DOES NOT include the mortgage payments!!!

When is it used?

Very commonly used as a valuation calculation to provide a “snapshot” of a property’s worth if accurate net operating income is being provided.

Limitations with Calculation :

Again, this is just “snapshot” of a building’s yield return on the net operating income. This calculation is best used to assess a building current value based upon how it is operating in a very generic sense.  Obtaining ways to improve revenue or decrease expenses is your next job to find value in it’s purchase.

CASH ON CASH RETURN

How is it calculated?

First Year Pre-Tax Cashflow / Initial Capital Invested = Cash on Cash Return %

Example :

$800,000 Sale Price with 5.00% rate over 25 years

$100,000 Gross Rents – ($10K Utilities + $4500 Property Mgmt + $7000 Taxes + $3000 Insurance) – $56,124 annual debt service =

$19,376 1ST YEAR CASHFLOW BEFORE TAXES

$160,000 downpayment + $10500 closing costs = $170,500 capital contributed to purchase property

$19,376 1ST YEAR CASHFLOW / $170,500 CAPITAL CONTRIBUTED = 11.36% cash on cash return

When is it used?

Cash on cash return is used as a one-year preview of a property with no assumptions other than income, expense, and debt service remain the same for 12 months.

Note, Cash on Cash Return does account for DEBT SERVICE being subtracted from gross rents collected for the year.

Limitations with Calculation :

Again, this calculation is a “snapshot” in time as to what your return on investment will be but using only fixed expenses and revenue figures.

However, this calculation is more of a true return on your investment based upon the dollars you are putting into the deal.

In Summary…

Leave us your comments for how we can improve this post on real estate calculations and how these calculations may of assisted you in your purchase of a real estate investment property.