In the last post, we talked about why you may want to consider a duplex as your first home. Some of the benefits of small multifamily homes are more bang for your buck, additional monthly income and the future investment potential.
If all that makes sense to you, then read on. Because now we’re going to talk about how to spot a good deal.
In addition to all the regular considerations such as location, condition, floor plan, amenities, outdoor space, and style, there is one additional question.
How much is the rental income worth? There is a dollar value to that income. But how do you go about calculating that value?
For larger properties, things can get a bit more complicated. Figuring out the investment potential of an apartment building means you have to consider net operating income, expenses, vacancy rates, depreciation, financing options and tax implications.
The good news is, that for a duplex, especially one that you occupy, you really don’t need all of that.
A quick and easy way to price income properties
There is a very simple standard used to compare income properties. It applies to any size apartment building and it’s the same method experienced investors use to sort out investment candidates.
That standard is called the Gross Rent Multiplier, or GRM.
And it works like this.
Let’s say you’re comparing two bags of coffee. One bag is 16 oz. and the other is 12oz. How do you know which one is the better buy? Usually, you compare the cost per ounce, right?
The GRM works the same way.
For example, let’s now say you’re considering two different duplexes. Duplex A is priced at $500,000 and has yearly rental income of $25,000. Duplex B is priced higher at $600,000 but brings in more income of $33,000.
Is the extra rent of Duplex B worth the higher cost?
If all else is equal, the answer is yes.
Using the GRM, we divide the purchase price by the total gross annual rental income. That number is the GRM.
In the case of Duplex A, the GRM is 20 and for Duplex B, the GRM is 18.
The lower the number, the less you pay for the rental income. (Yes, math geeks. That number is actually a dollar value and is equivalent to the cost for $1 of annual income. Heh… )
3 simple steps for rating income property
1. Make a list of the properties you’re interested in
2. Calculate the GRM by dividing the price by the total annual rent
3. The lower the GRM, the less you’re paying for that unit. Of course, there may be sound reasons why the lower price so you’ll want investigate further. But this method will give you clues on what to look for.
Now you have a simple and easy way to compare buildings with different rents, different number of units, location and condition.