Gross Rent Multiplier – Real Estate Investing – Part 8
This is Part 8 of my Real Estate Investing Series. You can view the first 7 Parts here:
One method investors use to evaluate an investment is the Gross Rent Multiplier. This is a very basic easy to use tool, but it also has some draw backs. A Free Gross Rent Multiplier Calculator is now attached to the Spread Sheet Providing Calculators and Examples. If it is not on the Spread Sheet you are currently working with go to the Investors Page at my web site and down load it now.
The Gross Rent Multiplier is very simple: You divide the Asking Price by the Gross Scheduled Income:
Asking Price/Gross Scheduled Income = Gross Rent Multiplier
So using our in Part 6 A, if you paid $200,000.00 for a piece of property and projected Gross Scheduled Income of $21,600.00 the Gross Rent Multiplier is 9.26, or:
$200,000.00/$21,600.00 = 9.26
The problem with the Gross Rent Multiplier is it is not always a good indication of return for several reasons:
• It focuses on Gross Income rather than net, with no accounting for expenses.
• In some markets it is hard to determine the Gross Rent Modifier that is prevalent due to a low number of rentals or a diversity in rental types, locations, etc . .
• Rents are not public information and finding out what the rent is on other local properties could be difficult.
• Properties rented for long periods of time may have rents that do not reflect the current market demand.
However, if a buyer has a particular Gross Rent Multiplier in mind you may also use the Gross Rent Multiplier as a way to determining the price to pay. Simply reverse the formula: You multiply the projected Gross Scheduled Income by the desired Gross Rent Multiplier to find a Maximum Offering Price:
Gross Scheduled Income x Gross Rent Multiplier = Maximum Offering Price
Taking our example above: A buyer feels he needs to achieve a 9 Gross Rent Modifier and the Gross Income is $21,600.00.
$21,600.00 x 9 = $194,400.00
The Maximum Price the buyer would want to offer is $194,400.
The Lower the Gross Rent Multiplier the better. This is just one tool, and maybe not the best, we will be using to look at investments. Follow these post and subscribe to this Blog for more information.