A gross rent multiplier (GRM) is a simple way to create a number to give you an estimate on the viability of an investment property.
The formula for GRM is simple. You just need the purchase price or market value and then divide that by the gross scheduled income. For duplexes, the second formula is another way to look at the calculation:
Gross Rent Multiplier (GRM) = Property Value / Gross Scheduled Income
Duplex GRM = Property Value / (GSI of Unit 1 + GSI of Unit 2)
This gives you a ratio between value and income. A smaller number indicates a better investment opportunity since it means the property would pay for itself in a shorter amount of years.
If you want to determine the Monthly Gross Rent Multiplier, simply multiply the yearly GRM by 12.
If a duplex has a value of 240k, and one side is renting at $1000 a month and the other side is renting for $1000 a month, you would calculate the following yearly and monthly duplex GRMs.
- $240k (PropertyValue) / ($1,000*12) + ($1,000*12)
- $240k (PropertyValue) / ($24k)
- $240k (PropertyValue) / ($24k) = 10 GRM
10 Years of collecting 24k = $240k
Monthly GRM = 12*10 or 120
120 Months of collecting $2000 = $240,000
The GRM is a quick and easy metric but very limited. A serious investor would use the GRM as a rule of thumb but would calculate the cap rate to really determine a property’s attractiveness. There are just too many variables left out with GRM to get an accurate measure of investment worthiness.
What is a Capitalization Rate?
Real estate investors looking for income duplexes should crunch a few numbers. One calculation is the capitalization rate or cap rate for short. The cap rate formula gives you a percentage which represents an idea of how long it will take to fully capitalize or pay off your property. This is done by taking the net operating income the property produces and dividing that by the value of the property. The value is either the most recent purchase price of the property or based off a current professional appraisal value; whatever is most accurate. The formula is presented below:
- Cap Rate = Net Operating Income / Property Value
What variables make up the Cap Rate?
To properly calculate the formula some variables need to be defined:
Gross Scheduled Income (GSI) – This is the gross amount of annual rental income you would collect if you had 100% occupancy, and if all tenants fully paid their rent. There may be some other income besides rental income that the property produces. If so, add as other income.
- GSI = (Gross Rent * Units) + Other Income
Vacancy and Credit Loss (VCL) – This is an estimation of how much money will be lost due to vacancies and non payment of rent. This lose is expressed as a percentage against your gross scheduled income. One way to get this estimation is by analyzing similar investment properties and seeing what their average annual vacancy rate and credit loses are for the year.
- VCL = Gross Scheduled Income * (Lose Rate)
Gross Operating Income (GOI) – This is when you take the gross scheduled income (GSI) and subtract your vacancy and credit loss (VCL).
- GOI = Gross Scheduled Income – Vacancy and Credit Loss
Operating Expenses – These are the expenses for the operation and maintenance of your property. Some examples are:
- Repair and Maintenance Costs
- Property Management Fees
- Property Taxes
There is some variability to what makes up this expense, so have the seller define the items and costs that makeup this number. The aggregate is the total costs to run the property. Not all expenses are operating expenses. This number should not include capital expenditures or other expenses that are not related to the running and operation of the actual property.
Net Operating Income (NOI) – This is the gross scheduled income you can expect from your property minus vacancy, credit loss, and operating expenses.
- NOI = Gross Operating Income - Operating Expenses
- Define the (GSI). (Gross Rent * Units) + Other Income
- Calculate the (VCL). (GSI * Loss rate)
- Determine the (GOI). (GSI – VCL)
- Define the Operating Expenses. (sum operating expenses)
- Determine the (NOI). (GOI – Operating Expenses)
- Determine the Cap Rate. (NOI / Property Value)
With any property, once you have your cap rate percentage, you must determine if the cash flow of the property meets your investment criteria.
#1 – Duplex Rentals are usually more affordable.
Duplex rentals are usually more affordable than a single family rental with similar age, condition, beds/baths and square feet.
#2 – Duplex Rentals usually have experienced Property Management.
Many times duplexes are bought to be a rental so there is usually more professional management of these properties. When you deal with a single family home rental, you may or may not be dealing with someone who can properly manage their property as a rental.
#3 – Duplex Rentals have more quality controls than Apartments.
Duplex rentals are better than apartments as you have only one other neighbor. The screening process for the other tenant will probably be more thorough. A property manager screening 500 renters for a complex can only be so thorough per renter application.
#4 – Duplex Rentals provide a home living space.
Duplexes for rent are better than apartments because with an apartment you are isolated to your unit. If you are lucky it may have a nice balcony. The right duplex rental can provide a nice yard for your kids and pets.
#5- Duplex Rentals provide a community environment.
Duplex rentals are in the community. They are part of a neighborhood. Apartments are complexes, with less community interaction. When renting a duplex, you get more than a rental, you get a home with a community.
Cash flow is important to any investor be it a stock investor, a widget investor or a real estate investor. The principle of diversification is touted no matter what the investment, and for good reason as it helps cash flow. If one area is clogged then there are only areas for income to flow from.
In real estate, a unit is a unit. Some living spaces are luxurious, and some living spaces are more modest, but at the end of the day it is simply a livable unit. With more units, there is more diversification and more cash flow.
We have a bias to multifamily properties, but the reason a duplex is the ideal solution for many investors are:
- A duplex is still considered residential real estate. Any property under 4 units resists the label of “commercial real estate”. In later posts we will explore why this is important.
- It provides diversification without concentration. What we mean by this is that you can have unit and property diversification. For example if you own a 10 unit property and there is an unforeseen event that hurts the viability of your property then all 10 of your units are affected. With duplexes, you double your cash flow potential without concentrating all your eggs in one property basket.
- Duplexes are multifamily properties that look and feel more appropriate in a residential setting. A duplex can “blend” in unlike a larger unit building.
Cash flow is important in any investment. Simply put, duplexes help double that potential.
If you don’t know what a twitter hashtag is or how to use it, then let’s clear up that confusion with a brief tutorial of what it is and specifically how real estate professionals can utilize them on twitter.
A twitter hashtag is a way to group and consolidate a post to a centralized location. By adding the hashtag symbol (#) next to a keyword it will send your post to a place where other people have hashtagged that keyword. People can then search that hashtag on twitter at search.twitter.com or find the compiled tags on exterior sites that track twitter hashtags.
So you have the gist of what they are, but how would someone in real estate use them?
Let’s say you post a listing on twitter. You would want to submit your listing post to a centralized place where people could look at all the posted listings on twitter. Therefore you would add the #listing hashtag after your post like this:
Listed a property on the beach. Address 1234 Beach Dr, City. #listing
Lets say you have a listing that also happens to be a duplex, then you may want to target the post with two hashtags as you can put as many hashtags you can fit into a 140 character post. A post may look something like this:
Duplex Listing. Address 222 Duplex Rd. City. #listing #duplex
Now that you know what a twitter hashtag is and have some examples of how to use for real estate, it is good to mention a couple general rules or twitter etiquette when using them. Hashtags are there to be used but used appropriately. Try not to spam them with posts that are unrelated to the hashtag, and hashtagging every post may turn off some followers. Use your best judgment on when and how many times you use them, with the goal to use them when you think they add value to the community.
Hoped this post cleared up some confusion and provided some ideas about using hashtags. #duplex.net #duplexes