The first thing that you must do when you are ready to analyze a property that you are thinking about purchasing is to make sure you have all of the numbers, and then right them done on a piece of paper. Now, calculate the cost of a potential mortgage, taxes as well as the gross annual income for the piece of real estate that you are considering. If you want a basic analysis of the potential return on your investment, these are the numbers that you must have. This is what you will need in order to calculate correctly and thus perform better at negotiations with the seller.
Yield
The most basic tool for analyzing any potential investment in the real estate market is yield. It also is, however, the least effective tool for calculating the economic value. It is a fast and easy method to get a basic idea of the potential the property possess.
In order to determine what the yield is, you just need to total up all of the income that will be obtained from the property in any give year. Next, you need to divide that number by the asking sales price. You yield will come to you in the form of some kind of percentage.
Gross Rent Multiplier
Calculating the Gross Rent Multiplier, or GRM is very similar to the same method that you use to calculate your yield. You use the same numbers, however, this time you look at them backwards. This calculation will tell you how long it will take you to earn back the purchase amount that you invest in the property. The lower the number that you come up with, the better the investment you have made. A low number means that it will not take long for you to get back what you paid and start making a profit from your investment property.
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Hi Sean,
This is great advice and an area I need to know a lot more about. Knowing you have the numbers right is crucial to being a successful investor. This is when it would be great to have a mentor.
I’d like someone to go over my figures and make sure that I have them right before I sign any contracts.
I never understood what yeild was or how it was calculated, and I had never even heard of GRM. Thanks for educating me.
Just so you know there are a couple of typo’s in the first paragraph. Cheers for the great info.