The tool continues
Posted on November 21, 2006 - Filed Under Business |
My objective is two-fold. First, make sure the property has a positive cashflow. Second, the Gross Rent Multiplier (GRM) is between 3 and 7. I’ll talk a bit more about the GRM later on.
Now that the givens and assumptions are known, the monthly expenses can be calculated. Please keep in mind that all dollar figures below are rounded to the nearest dollar. I don’t care about 27 cents.
| Expenses (per month) | ||
| Management($) | 240 | |
| Maintenance($) | 240 | |
| Vacancy($) | 120 | |
| Utilities($) | 0 | |
| Taxes($) | 322 | |
| Insurance($) | 167 | |
| Other Expenses($) | 0 | |
| TOTAL($): | 1088 | |
Next is to calculate the Net Operating Income (NOI). This is a fancy term for the total rent minus all the expenses.
NOI = Gross Rent - Expenses = $2400 - $1088 = $1312/month
Now the final step is to calculate the cashflow (negative or positive). This calculation is performed by subtracting the monthly mortgage from the Net Operating Income (NOI).
CashFlow = NOI - Mortgage = $1312 - $1217 = $95/month
The first of my criteria is met. It does have positive cashflow, albeit not that much.
Next, the Gross Rent Multiplier. The GRM is nothing more than the purchase price of the property divided by the gross yearly rent. This gives a whole number. Typically GRM’s that are between 3 and 7 have no problem cashflowing positive.
GRM = Purchase Price/Gross Yearly Rental Income = $193,000/$28,800 = 7
The second of my criteria has been met.
The cashflow calculated here is the absolute minimum cashflow. All the assumptions were taken at their maximum value.
More on this next time . . .
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Comments
3 Responses to “The tool continues”
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Cliff,
You may want to look into CAP rate. This will be your annualized return on investment and will help determine if this is a good investment or not.
Thejester
What about depreciation? Or already included in the tax item? I don’t know what the conventions for the property industry are. I would also take out the principal part of the mortgage repayments to get a cashflow from operations type concept. As the latter belongs in investing cashflows.
Jester, the investors are split pretty much 50/50 on whether cap rate has much of an effect on price and value if it is a four units or less. All are in agreement that cap rate is applicable with four or more units. So for this “tool”, I’m ignoring cap rate. Once I move up above four units then cap rate will be a consideration as well.
Moom, you’re getting ahead of me!
I’m going to talk more about depreciation tomorrow. It isn’t included in “taxes”. In that case, “taxes” are the property taxes owed on the property. “Depreciation” is a write off come tax season to help lower my tax bill.