Apartment Investment Income Property Guide
When looking at a real estate investment in the South Bay or the rest of Southern California, it is important to consider the following measurements to analyze your opportunity.
- Price: Asking price.
- Down payment: Amount required to purchase property.
- # of units: Total living spaces.
- Cost per unit: Sales price divided by # of units.
- Gross rent multiplier. (GRM): Sales price divided by scheduled gross income. GRM is one way to determine the price of a building. It is the fast and quick way many investors quickly evaluate a property.
- Market GRM: If rents are below the comparables in the area and you increase them this will give you the market GRM as scheduled gross income increases.
- Capitalization rate (CAP) Net Operating income divided by sales price. This is another way to determine price. Many consider this a better evaluator on an investment worth compared to GRM since it is based on revenue after expenses.
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- Market Cap: If you raise your rents than net operating income increases giving you market cap. Market Cap and market GRM are good incentives for buyers when they see upside potential due to low rents.
- Scheduled gross income: (All income) rent, laundry machines, rented garages etc.
- Gross operating income: scheduled gross income less vacancy %. We usually use a 5% vacancy rate.
- Vacancy rate: is an estimate used to average out vacant units per year.
- Operating expenses: total cost needed to operate the building. This does not include loan payment. Examples are gas, electric, water, trash, gardener, property taxes, management fee, fire insurance.
- Net operating income: Gross operating income minus operating expenses. (Does not include debt service which is loan payment.)
- Loan payments: Total loan payments on property. Includes any secondary or third financing.
- Cash flow: This is what the property makes after deducting all expenses including loan payment.
- Principal reduction: This is the principal amount on your loan that you pay down annually.
- Total return before taxes: Add pre tax cash flow and principal pay down. It is up to the owner to figure out what he will owe once he does his taxes at end of year.
- Property taxes: Sales price times .0125. Fire insurance I just call the agent to get a quote. Some use 275 times # of units.
These numbers often appear in an evaluation of a investment property. Often called in the industry, a set up sheet.
