OK, Who Has That Formula?
For determining if a property is worth purchasing by using the cap rate, vac rate, taxes, management fees etc.
For determining if a property is worth purchasing by using the cap rate, vac rate, taxes, management fees etc.
I would highly reccomend reading Robert Allen's "No money down for the 90's" so you understand the formula.
Basically you take the annual net operating income and divide it by the purchase price. You get the NOI by taking the total annual income and subtracting all expenses.
GL
Ray Higdon
I forget where I learned this from, but a quick way to tell if a rental is a good deal is to take the expected rent and multiply by 72. This will equal your max purchase price. Of cousre this does not leave room for other important considerations shuch a land-lord paid utilities, repairs, etc. But it does give a good estimate.
Rent X 72 = Purchase Price
I use similar formulas as the others here. Current gross rents (not expected after full) minus vacancy (i.e. 6%) and collection loss (i.e. 2%) = effective gross income. One measure is to multiply annual effective income times 7. Expenses in my experience run about 36% (not including debt service). Another measure is NOI/ Cap rate. Subtract the expenses to get your NOI.
Divide the NOI by your cap rate (% return you want), say 10%. $20,000 NOI would equal $200,000 price. Other factors, of course, are condition, location, age, terms, etc. Do this a while and you should be able to get a ball park value in about 1 minute. See if it's worth your time to look at further! Happy investing!
I have an excel spreadsheet that allows you to plug in all the numbers and get all the necessary percentages.
_________________
Veritas vos Liberabit
[ Edited by 3qu1ty on Date 10/07/2004 ]
Quote:
On 2004-09-22 14:43, SavvyYoungster wrote:
I have an excel spreadsheet that allows you to plug in all the numbers and get all the necessary percentages. When I get my ftp back up, you can download it.
Thanks!
v = noi/rate = value
r = noi/value = rate
Subtract Expenses from GROSS ... double check all figures.
You're wasting your time with all those formulas. A great cap rate property that does not cash flow is no bargain. Cap rate calculations are meaningless for single family properties up to quad-plex properties because comparable sales will determine market value, not the cap rate.
A great gross rent multiplier might look good until you discover that the deferred maintenance results in a high turnover rate and a high vacancy factor.
If you want to know whether a rental property is worth acquiring, subtract your own projected operating expenses from the ACTUAL income. If you have a positive number that is at least 125% of your debt service, then the property is worth consideration.
For the one to four unit rental properties, cash flow is your discriminator. If the cash flow does not support the property, it is not worth purchasing.
Quote:
On 2004-09-23 20:31, NewKidinTown2 wrote:
You're wasting your time with all those formulas...subtract your own projected operating expenses from the ACTUAL income. If you have a positive number that is at least 125% of your debt service.
I thought that was a funny statement.
Anyway, I'm not sure when the ftp will be up, but if you e-mail (addy in profile) me, I'll send you the Excel sheet.
[addsig]
Savvy I sent you my email address yesterday.
I never use Gross Rent Multiplier while deciding whether to buy a multifamily(under 4 units) because it is not applicable. Rents have never kept pace with property appreciation (atleast in the past 3 years here in the northeast). GRM makes more sense if rental values kept pace with property values. I always use what positive cash flow I would get after ALL expenses and if I am comfortable with that, then only I invest in the property.
Great, I'll check my e-mail when I get home and send it to you today or tomorrow.
[addsig]
Savvy,
I'm not sure how to take your comment. If you don't understand the logic behind the process I outlined, then maybe you don't see why the cap rate calculations are meaningless and why GRM calculations can be grossly misleading.
Thanks for the offer of your spreadsheet but I already have the one DaveT offered everyone last year. It does everything I need it to.
This is what I was asking:
http://www.thecreativeinvestor.com/ViewTopic34623-33.html
Don't forget me savvy!
fmmp,
It appears that the thread you indicated does contain a full and complete answer to your question.
Quote:
On 2004-09-24 23:18, NewKidinTown2 wrote:
Savvy,
I'm not sure how to take your comment. If you don't understand the logic ...
I was laughing because you said that he was wasting time with formulas and then offered more.
[addsig]
I just e-mailed to an aol account tonight (I think it is yours). If you didn't receive it, shoot me another e-mail as my wife might have deleted the original.
[addsig]
This website has a great calculator of sorts, the "Proforma-nator". It is difficult to find, though.
Here's a link for easy access:
http://www.thecreativeinvestor.com/modules.php?name=Tools&op=ProForma&FMV=4,500,000&PurPrice=2,200,000