Long term investments such as single family homes, duplexes and apartments are great in a market where credit and mortgages are becoming increasingly harder to receive. If you have the ability and the know-how right now is the market in which to make your mark. We would like to extend to you our help and expertise in these areas. These are some of the important items that you will need to know in order to be a success in real estate.

Below are some terms we use to determine value of a single property or to compare a group of properties. Click here to see a sample spread sheet which shows how these terms are used to compare properties.

Gross Rent Multiplier -The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM provides a rough estimate of value. Only two pieces of financial information are required to calculate the Gross Rent Multiplier for a property, the sales price and the total gross rents possible.

A market GRM can provide a rough estimate of value, but it does have some limitations. The GRM calculation doesn't include a property's operating expenses and vacancy factor. We could have a situation where two properties have approximately the same potential rental income, but one property has significantly higher operating expenses. The above formula would result in a questionable estimation of the market value for these properties. Also, the above GRM formula uses the monthly potential rental income and doesn't account for a vacancy factor which could have an impact on the accuracy of the property value estimates. The seasoned investor understands the above limitations and uses the gross rent multiplier to get a quick feel for the potential market value of an income property.

The GRM give no indication of the profitability of the real estate. This is a rough estimate only. The GRM can be used quickly however the efficacy of this tool is nominal.

The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of income producing properties. This is way of comparing real estate investments to more conventional investments such as CD’S, IRA, and Mutual Funds Etc.

The Cap Rate gives a more reasonable idea of what to expect as far as profit margins go. This tool can be used in a manner that will benefit the investor and show truthful projections of returns. Desirable cap rates range due to the investors preferences, however the higher the cap rate the better the investment.

Investors expect a larger return when investing in high risk income properties. The Cap rate may vary in different areas of a city for many reasons such as desirability of location, level of crime and general condition of an area. You would expect lower capitalization rates in newer or more desirable areas of a city and higher cap rates in less desirable areas to compensate for the added risk. In a real estate market where net operating incomes are increasing and cap rates are declining over time for a given type of investment property such as office buildings, values will be generally increasing. If net operating incomes are decreasing and capitalization rates are increasing over time in a given market place, property values will be declining.

Net operating income is determined by subtracting vacancy amount and operating expenses from a property's gross income. Operating expenses include the following items: advertising, insurance, maintenance, property taxes, property management, repairs, supplies, utilities, etc. Operating expenses do not include the following items; Improvements such as a new roof, personal property such as a lawn mower, mortgage payments, income and capital gains taxes, loan origination fees, etc.