“John, please tell me if I’m wrong. How do they come up with these prices. I mean, if I’m missing something here, set my thinking straight.”
My customer and I were looking at multi-family income properties. He wasn’t looking for real estate deals per se, but properties that made good longterm investments.
Regular readers know I’ve invested in apartment buildings over my career. When I began 26 years ago, I learned to use Gross Rent Multiplier (GRM) on buildings with 4 units or less, and Cap Rate on 5 or more. It’s not a written-in-stone-rule, but it’s been common practice.
More important, when looking for good real estate deals, you must have a strategy. For income-producing that should be using formulas that apply to revenue and expenses. This is different from buying a home you’ll live in as that will not produce either.
We ran the GRM on three buildings and the numbers made no sense. Multiples were 18, 22, 24. Those are high numbers. To make these work, we’d either have to buy the properties for much less, or raise rents by 40+%. And in a rental market that’s easing… good luck with that.
Here’s how you apply GRM: take the purchase price and divide it by the gross annual revenue (gross rents). Let’s try this example on a $500k tri-plex with incomes of $2000, $1800 and $1800. Add those up and multiply by 12 months and there is $67,200 in gross rents.
Now dividing the purchase price of $500k by $67,200 you’ll get a GRM of 7.4. That’s a great multiple in today’s market… and rare. Today you’ll be lucky to find multiples below 15. So use 15 as a benchmark when analyzing real estate deals and income properties.
So, we started looking at prior sold “comps” nearby. We learned the buildings were not being sold on any income-formula, but by square footage figures. The properties were also being sold on land plus construction costs. And get this… one was being sold on “what the property gross rent could achieve in the future.”
To add insult to injury, we were told the best buyer would be someone with cash who’d use it to bring family and friends to enjoy during high season. And then the proverbial, “look at this location on the intracoastal – this should add huge value. Sorry, that’s not a good way to sell investment property. (But it was a nice view…)
Okay, um…
So, how do you find good real estate deals in today’s real estate market? You need to use every tool you can possibly find to arrive at a value. Income properties are not being valued on revenue and expenses. Today you need to be “creative.”
But if that doesn’t work for you, hit the ejection button. You may be better off waiting for real fundamentals to return to this real estate market. And when it does, you’ll be better prepared to analyze property and find nice real estate deals.
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*** If you’ve been looking for your dream home in a dreamy place, check out my newest video about the Lake Ida neighborhood.
*** Pickleball Fanatics, the 3rd Annual Delray Beach Pickleball Open starts today!
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*** Your Weekly Inventory Update ***
* 4 years ago there were over 54,000 properties available in S. Florida
* It bottomed in February 2022 at 14,485… a 73% drop
* Last week there were 28.096 available… a 102% rise in 14 months
* This morning’s Inventory is 28,027
*** Inventory is DOWN 16 weeks in a row ***
