The gross multiplier???

Question

if I said that right... The monthly rent needs to be at least 1% the purchase price - am I hearing this right? I'm shopping rentals with this factor, but I already have one that has become a nightmare, and I'm in the process of evicting to sell, because it is just not worthwhile. I'm not at 1% with that one.  Am I understanding correctly that this is at least the desirable minimum GPM...(GM) ..whatever??

Ryan Webber · Answer

I get all the information I can from the seller and I figure what I think all the numbers would be from my experience, and then I compare the two and come up with my "numbers" to figure off of.  If I see any drastic differences in what I expect it to be and what the seller is telling me, then I bring it up with the seller.  I know what apartments will rent for, and if I didn't I would just call comparable "for rent" signs in the area.  I know some basics of what maintenance and vacancy is going to be.  I can call and get insurance quotes.  I can look up the taxes.

I would also take some consultation in the seller's numbers.  Outright fraud is not common.  I would just make sure that I agree with all of the numbers presented by the seller and address any discrepancies.

Brian Schroeder · Answer

Ok,  I understand don't trust anyone.  How do your know that the Profit and Lost statment is correct.  Is it part of the schedule R,  of there tax return,  or is it just a sheet of nubers that the seller puts together for you?  If it just some number that the seller put's together for you,  I dought if you can even think it is the correct numbers,  you might as well do your own judgements and plug in your own numbers.

Tom McGiveron · Answer

also - when you run an income and expense analysis of a property - if it's an apt complex or multi-family or even a SFH rental - and has been for a few years - getting all those numbers should be a contingency or part of a binder - allowing you access to the sellers income and expense data for the past 2 to 3 years...

of course, being an investor yourself -  you've got to remember the number one rule for investing (for us anyway) - DON'T TRUST THE SELLER.  it's like X files - "trust no one".

Ryan Webber · Answer

1% of sales price should be the rents is another way of stating a monthly Gross Rent Multiplier (GRM) of 100.  A GRM is a basic appraisal method and can be a valuable tool to sift through the multitudes of potential deals, BUT you should ALWAYS run an actual income and expense statement on a rental property before you make an offer.

On a side note, the 1% number is the general break even point to have positive cash flow with typical financing.  It does not necessarily make it a good deal.  You might be making $1 a month cash flow with those numbers.  You won't be able to determine your exact cash flow until you figure an income/expense statement.

Danny Kay · Answer

always remember that those type of equations are rule of thumb to get u in the general $ amount. They should never make or break a deal.

Tom McGiveron · Answer

a cash on cash analysis of an investment is an excellent measure - IT DEPENDS ON THE NUMBERS YOU OBTAIN THAT MAKES THE DIFFERENCE.

any ratio or equation is only as good as the numbers you input.

Tom McGiveron · Answer

minna,

forget all that sh*t.

CASH ON CASH RETURN

NET OPERATING INCOME

CASH FLOW

to me..in my humble opinion - and it's very humble...these are the provinces of basic real estate investing.

that 1% of purchase price is like a quick reference, period.