It’s not too often I get asked questions about the specific math behind investment analysis, but for some reason  I got asked basically the same question 2 days in a row.    If I might paraphrase the question goes, ” What numbers should I be looking at?”   And of course there is no single answer to that question.   So to start out I’ll focus on a couple of common analysis methods that are relatively easy and fast.  Methods one might use as a way to take a quick first look before getting into really serious analysis.

I’m not going to get into any detailed math lessons here.   I’ll talk more about the math rather than try to teach it.  As the math gets more complicated I’ll give some links for further explanation and some spread sheets.  None of this is secret or proprietary.   It’s more or less the ‘numbers language of property investing.  If you plan to get serious about real estate investing, I suggest you make it a point to learn some of this  numbers language.

Gross Rent Multiplier (GRM) is simple formula  used as a way to take  first look at the numbers. The math is very simple: Market Value/annual rent= GRM.

GRM is a method to compare the prices of similar income producing properties.   It looks at the value based on what other similar properties have already sold for and compares rents.   Fro Example, if a small apartment building that sold for $480,000 had gross annual rents of $75,000 the GVM is 6.4 (480000/75000=6.4).   If you are looking to buy or sell  a similar apartment you might look at that 6.4 ratio to see if  your similar apartment is realistically priced

The difficult part of GRM is doing the comparable research.  If you can compile numbers on several similar properties the GRM  becomes a very quick easy way to see if a building is priced under or over what the market is paying.   All that being said GRM is probably not appropriate for every type of real estate investment.   Applying GRM to single family rentals would probably not be very useful.

You can find numerous articles on Gross Rent Multiplier by simply doing a Google search.