How To Quickly Calculate If A Real Estate Deal Is Profitable

gross rent multiplier real estate as a business Oct 31, 2022
 


Figuring out whether a property will cash flow can be tricky. But with the right formula, it can be done in just 30 seconds.

This blog post will teach you the GRM (Gross Rent Multiplier) formula, which is a quick and easy way to determine whether a property is worth your time for due diligence.

Let's pretend the purchase price of a property is half a million dollars. and the rent per year is about twenty-two thousand dollars, which is about eighteen hundred dollars a month. What you would do is you would take the purchase price of five hundred thousand dollars and divide it by the annual gross rent of twenty-two thousand.

And that turns out to be about twenty-three times. So in other words, it would take you twenty-three years of total gross rent to pay for that property in its entirety. So what does that mean? It essentially means that the higher the GRM, the longer it's gonna take to pay for it.

Whereas if you compare that let's just say if you bought a hundred thousand dollar house that you could rent out for a thousand dollars a month, you would take that thousand dollars times twelve. It would be twelve thousand and you would take a hundred thousand divided by twelve thousand and you would get about eight and a quarter.

So you think about it. The rent on that house is half of what it is on that bigger five hundred thousand dollars property but because the purchase price is one-fifth, the rent as a ratio to the total value is that much higher.

So the moral of the story is that if you're looking for cash flow, you need to start with the GRM because the higher the GRM number the lower your cash flow.

Now there are a lot of other factors in due diligence, like figuring out the expenses, the property, the rentability, the vacancy, and all the different factors that come into your ability to actually collect the rent. But personally, before I spend any time doing any of those things. I first look at the purchase price. I look at the potential cash flow. I divide the purchase price into the cash flow.

And if this GRM is more than seven or eight, I don't buy, I move on. So there you have it. GRM there'll be your three favorite letters to help you figure out if a property will cash flow or not.


Marcin Drozdz

The information contained herein is for general guidance on matters of interest only. This information contained herein is not intended to provide you with any advice on financial planning, investment, insurance, legal, accounting, tax or similar matters and should not be relied upon for such purposes. M1 Real Capital Inc, Marcin Drozdz is not a financial, legal or tax adviser. You should assess whether you require such advisers and additional information and, where appropriate, seek independent professional advice. You understand this to be an expression of opinions and not professional advice. You are solely responsible for any actions you take with the content and hold M1 Real Capital Inc, Marcin Drozdz or any of his affiliates harmless in any event or claim.

 

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