Investment Property Basics

Terms to Know:

• Market Rent- The amount the market considers reasonable for the space rented

• Gross Rent Multiplier (GRM)- the Sales Price divided by the Gross Monthly Income

• Gross Income Multiplier (GIM)- the Sales Price divided by the Gross Annual Income

• Operating Expenses-  DO count taxes, insurance, maintenance, repair, landscaping, legal fees, condo fees, etc.  DON’T count mortgage payment (principal or interest, or PI), depreciation, or income tax effect.

• Net Operating Expenses (NOI)- it’s the Effective Gross Income minus the Vacancy Rate minus Expenses.

• Market Value (formula for buildings larger than 1-4 family units) is the NOI divided by the Capitalization Rate (Cap Rate)

• Cap Rate is the NOI divided by the sales price of a recently sold property. “Ballpark” Rules of Thumb: (note: these are given as very generalized reference items and will vary based on the property, specific situation, and negotiated terms)

• Basic Rent- usually a little lower than 1% of the market value. (For example, the rent for a $150,000 condo would likely be $1450.00 a month or under.)

• The service fee for a property administrator would range from 6-10% of the monthly rent.  A property administrator is optional, but can manage all aspects of the renting process. 

• Special condo note: the monthly condo fee is paid from the monthly rent amount.

Ways to Determine Rent:

• Review the newspaper

• Call large property management companies in the area

• Check rental amounts in the area

• Go door to door- what are the rents in the neighborhood?

• Call for rent amounts of nearby vacant units- these are the competition, not the filled units.