The property’s market value would be about $370,909. The current cap rate on single family homes is 5.5 percent. So the property will generate $20,400 a year. Let’s say an investor finds a home that generates $24,000 a year in rent, with annual operating expenses of $3,600. The income approach uses two variables: the net operating income (NOI), which refers to a property’s income after all expenses are paid and the capitalization rate, or cap rate, a percentage that expresses a property's estimated NOI as a percentage of its market value. “Here, you’re being more specific about the costs of taxes, insurance, vacancies, and repair and maintenance to calculate a net return.”
“This is Real Estate Investing 101,” says Sanchez. The income approach allows investors to estimate a property’s value based on the income it generates. To take those into account, investors can use the income approach. The GRM doesn’t take into account any of the real expenses that come along with real estate ownership, such as property taxes or insurance premiums, which affect the investor’s actual income. The $150,000 home would have a GRM of 10.4 ($150,000 / $14,400).Īll other things being equal, the gross rent multiplier approach might suggest that the $200,000 home would be a better investment, since it would take a shorter time to pay off. As in the example above, the $200,000 home renting for $2,000 a month has a GRM of 8.3. In the example above, it would take the investor 8.3 years.Īn investor could use the GRM approach to compare two investment properties, such as a $200,000 home that collects $2,000 in rent and a $150,000 property that collects $1,200. The GRM could be used as an estimate of how long it would take an investor to pay off a property based on rent income alone.
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“It tells you whether a property is in the ballpark you’re interested in.” How to calculate the gross rent multiplierĪs an example, a home with a fair market value of $200,000 that rents for $24,000 a year will have a GRM of 8.3: “This is really back-of-the-napkin math, to see if you even want to double-click on a property before you begin itemizing the costs,” says Sanchez. The Gross Rent Multiplier (GRM) functions as the ratio of the property’s market value over its annual gross rental income. The average price per square foot of comparable properties.įor example, if similar homes sold recently in this neighborhood for between $160 and $175 per square foot, an investor would estimate a 2,000-square-foot rental property with similar characteristics would be valued between $320,000 and $350,000.The home’s features, for example the number of bedrooms and bathrooms, and the presence or absence of garages, pools, decks, fireplaces, etc.Location and neighborhood, including proximity to amenities like schools and parks, as well as to less appealing things like highways and overpasses.“It’s typically referred to as an appraisal.”Īmong the key characteristics used in the SCA: “Even if you don’t know much about real estate, this method should be familiar and self-explanatory,” says Sanchez. It can be used for residential properties as well as investment properties, since it does not take rental income into account.
The sales comparison approach (SCA), also known as comps or the price-per-square-foot method, compares a property to comparable properties that have recently sold in the area. Having multiple exit strategies is always advantageous.”īefore entering into any real estate deal, it’s essential to have properties appraised by certified appraisers or real estate agents. “If you buy an apartment complex,” Sanchez added, “the list of parties you could sell to is shorter because the criterion they use to evaluate the investment is strictly return on investment. That audience is essentially anyone looking for a property, whether it’s a family looking for a home or another real estate investor. “The potential buyer audience is much broader.” “What makes investing in single family homes unique is its flexibility in the event you want to sell your investment,” says Leo Sanchez, Mynd’s head of institutional single family residential acquisitions. Each is a rule of thumb if buyers or agents use more than one on the same property, they can get a better picture of its value.ĭifferent appraisal techniques may be more useful for different types of properties (an apartment building versus a single family home) and different types of stakeholders (a family, a retail investor, and an insurance company). There are four primary methods a real estate investor or agent can use to evaluate the potential value of a rental property. How to calculate property value based on rental income | Mynd Management Skip to main content
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