Posted by John W on November 30, 2001 at 15:19:31:

>>John I went to great pains to point out that the break even point will vary for different properties, even giving examples, before I went into the GRM. I also said to do the GRM calculation for as many properties as possible in order to find out what is typical in your own area .>I disagree with excluding the down payment. I always use the full price. I deserve interest on my money the same as the bank does. You can make almost any property break even if you put up enough cash, then don’t make any interest on it.>Besides it is not an equal way to compare properties. If they have different down payments it throws off your figures.<<

I understand that different down payments produce different results, that is why I specifically stated that “all other things being equal”. Do I believe that this the way all deals occur? No. But one must have a starting point, or benchmark, from which to compare with.

There is no formula for what you want. Properties vary too much. You have to figure them out one by one - that’s where the profit is.

For example two identical apartment houses on the same street, 2 blocks apart. A is in the city and taxes are $10,000 per year. B is on the other side of the line in a suburb and taxes are $4000 per year. A has a 9% mortgage, B was recently refinanced at 4%. In A the landlord pays the electric bill, B has separate meters.A is electric heat, B is gas. I could go on and on. In this case B would be a much better buy but if you only knew the price and the rental income you would buy A (which has a slighly lower price and slightly higher rent).

Let the sucker who doesn’t do his homework have A. You do your homework and buy B.

Now having said that, there is a rule of thumb that wil eliminate the overpriced properties quickly. Take the price and divide by the annual rent. This will give you the Gross Rent Multiplier or GRM. I have seen GRM’s all the way from 16 (the height of the boom, stay away!) down to 3.25 (That one I bought!).

The general rule is if the GRM is 6 or more the place won’t carry i.e, negative cash flow.

This is just a quick estimate, you only use it to weed out the obvious losers, if they look good you do more research.

Do the calculation on a lot of properties and you will soon get an idea what the typical GRM is in your area.

Re: I need some Formulas…PLEASE! - Posted by Brent_IL

Posted by Brent_IL on November 29, 2001 at 01:04:41:

It’s not like that. There are guidelines, and they change with locations, but there isn’t one magic formula that will relieve you of research.

In my area only,

A $60,000 house (I can?t find any) will rent for $450 to $480 per month. Around .75 to .80 of one percent of the actual market value.

I factor 2% of FMV annually for maintenance because I’m counting in things like a new roof when it?s needed, et al. Most of the non-investors you will talk to spend less than 1%/yr. If they spend more it?s usually on landscaping.

Monthly expenses and allocations range between 30 and 40% including taxes 2.7-3.0%.

You can guess about financing but you need to know about any existing juniors. If your seller lived around here, and owned the property for 8-10 years, I would guess that he paid ~ $30K. If I made a further guess about how much of a down payment he made, I could guess the loan amount, and using the rates available at the time, calculate his probable mortgage payment and remaining balance. Now I know his expenses and payments.

All of this is worthless unless you know the lien situation to give you a truer picture of what the seller is facing each month.

When asked, a sincere seller will give you the numbers that you need. Formulas are great when used to decide the probability of your seller giving you accurate information. You don?t have to spend time if he?s blowing smoke. Every property has something different.

Re: I need some Formulas…PLEASE! - Posted by John W

Posted by John W on November 29, 2001 at 19:12:34:

I agree with using the GRM as a weeding out tool but disagree with the assumption that a GRM of 6 or more will generally produce a negative cash flow.

The fact is, the breakeven GRM will vary by, among other things (down pmt), location. With all other things being equal - down pmt, operating expenses, etc; the general rule should be that the lower the GRM the better. GRMs of around 8.5 are cash flow neutral in my location at 10% down. I have a property in escrow that schedules out to be cash flow positive at a GRM of 8.

I guess my point is, is that one should know what cash flow neutral is for his/her area.

John I went to great pains to point out that the break even point will vary for different properties, even giving examples, before I went into the GRM. I also said to do the GRM calculation for as many properties as possible in order to find out what is typical in your own area .

I disagree with excluding the down payment. I always use the full price. I deserve interest on my money the same as the bank does. You can make almost any property break even if you put up enough cash, then don’t make any interest on it. Besides it is not an equal way to compare properties. If they have different down payments it throws off your figures.