Investor · Reseda, CA · Member since 2014 · 16 posts · 6 votes
Does anybody know the correct way to calculate this ratio? I have seen two ways on the internet.
House Value $200K and monthly Rent is $900 - This is an example
1. Monthly rent 900/ 200,000 = 0.005
Ideal valuation measure for investment property is 0.7% or more while 0.5% is acceptable and below 0.5% is unacceptable (monthly gross rental income divided by the current fair market value of the property should ideally be 0.7% or higher)
2. Annual gross rent 10,800 / 200,000 = .054 What is the Ideal valuation measure for this calculation?
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
12y
What you are talking about is different forms of Gross Rent Multipliers.
On an annual basis it is usually shown as V/R=GRM. In you number two example it would be 18.5. That is a horrible number by the way it should be closer to 6-7.
On a monthly basis it is normally expressed as a percentage as you show. Although it might occasionally be expressed as the price = X times rent. In your example number 1 it would be "the price is 222 time rent" This is also a horrible ratios
I am curious where you cam up with that idea? I can't imaging buying any deal at that high of a price. it makes sense for very few investors to even buy at a price higher than 1%. If you search here you will find something called the "2% rule" where proponents say you shouldn't buy a rental unless the rent is 2% of the purchase price.
I understand you are in California and finding such deals may seem impossible. So the question to consider is "Do you buy a bad investment because no good investments are available?"
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
12y
@John Thi Gross Rent Multipliers and Cap Rates do not identify if a property is profitable or not. They only tell you the desirability of the property or the income stream.
A 30 GRM means the property is HIGHLY desired. As far as cap rates the lower the more desirable the NOI is. If two properties have a NOI of $50 000 it may sell at a 5 cap ($1, 000, 000) but in another area the same $50, 000 NOI may sell at a 12 cap ($416, 667). The market is saying that the NOI is less desirable for market reasons and will only offer at a 12 cap.
Thanks everybody, I was listening to a podcast and I started researching this ratio when they kept talking about it. This is not my idea: I got it from the link below.