Many investors have a favorite strategy for weeding through the numerous income properties on the market in their search of a solid investment. Some use the “price-per-door” as a benchmark. Others consider the “gross rent multiplier (GRM)”. Yet others are convinced that capitalization (cap) rates are the way to go.
Which evaluation tool is best?
Investors have asked me the above question numerous times. A more profound question would be, “Is there really a BEST way? Let alone a right or wrong way?” Let’s explore some of the common comparison strategies.
Price-per-square foot
This technique is extremely easy to apply. Simply take the building price and divide by the number of total square footage of improvements. Thus, a 12,000 square-foot property with a list price of $1 million has a price-per-square foot of $83.33/sq. ft. This can be a useful tool when comparing different properties in a demographic area. It is not, however, without its limitations. For example, this method does not take income or expenses into account. Evaluating a property exclusively with this method and you could find yourself money pit and you wouldn’t even know it.
The great real estate boom reached its apex in 2006—and then the bubble burst. More specifically, the single family home bubble burst. Now, for the first time in years, condos and townhomes are suddenly affordable for a lot of people in places like California, Arizona and Florida. Combine this with Obama’s tax incentives and you’re looking at a buyer’s market. While this is great for able and willing prospective homeowners, it could prove to be a trap for real estate investors.
Joshua Dorkin
Charles Feldman
Ted Karsch.
