Income Stream Methodology...
I just heard of a technique called income stream methodology. (heard it on the Carleton Sheets course). This seems like a quick and easy way to determine the maximum you could pay for a property based on the income it produces.
If I understand it correctly, if I multiply the annual gross income of a property times 6 or 7, I get the maximum amount that I can pay for the property, and still have positive cash flow.
So, if I can get $800/mos for a rental unit, that's 9600 a year. Multiplied times 7 equals 67200. I tried working the numbers backwards for a loan and it seemed to work that way too.
Is this a common methodology/tools used? This seems so much better than my calculating out the mortgage of a property and then trying to see if rents would cover PITI.
Thanks in advance.
Robert
You will find a few methods of determining market value based on the income produced.
Keep in mind that in your area the multiplier will be diferent than other areas. Where you are at if may be very hard to find positive cash flow properties. So the cash flow numbers may not make sense but it might still be a deal.
hibby76 wrote a very good article about the 1% method. http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=523
I realy like the ideas found in the section "So Where Do I Go From Here?" If you take those concepts and fine tune what ever formula you use then you will have a fast and acurate method.
Lacashman,
Thanks for the help and the pointer to the other threads. I'll be sure to check them out!
So, if a property does not product positive cash flow, you are not going to flip it, then doesn't that put you into the realm of "speculation" that the property value will go up? I realize you may be buying a piece of property that you know a retailer has their eyes on to build or for some other project, but are there some other reasons to buy a piece of property that does not have positive cash flow?
Thanks,
Robert
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LaCashMan,
I think I see what you were trying to say. If I only use the formula, and stop there, then I have not taken into account all of the factors that affect my cash flow. Is that correct?
Thanks,
Robert
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As a rule of thumb, the Gross Rent Multiplier is a fairly efficient screening tool. It does not replace a detailed cash flow analysis.
In my experience, I generally breakeven at a GRM of 6.5, so 6.0 should suggest a positive cash flow. If you start with the average market rent for properties similar to the one you are evaluating and for the same or similar neighborhood, then multiply that monthly rent by 12 to get the annual gross rent. Multiply the annual gross rent by 6 to get an approximation of the maximum amount you might be willing to pay for the property.
If the sale price is in the same ballpark, then your detailed cash flow analysis will tell you exactly how much downpayment you will need to generate an acceptable cash flow.
DaveT,
Thanks to you and LaCashMan for some very helpful and well stated information!
Thank you.
Robert
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