When investing / buying investment properties it can be difficult to see if you are overpaying for a property because with change of areas prices change.
So are you overpaying for a property in a given area? Or getting a good deal relative to the area?
There is a way to figure it out.
Graph the price to GRM or Annual Income and see where you land on the trend line.
- Identify the area you are looking in (comparable neighborhood by the investment)
- Determine the timeframe you will look back in time to compare the property with.
- Choose property type. Condo or SFR. Duplex or 4plex, etc.
- Download(if you can) the data: specifically rents for the property and the list price or Sold Price.
- Make the rents annual (*12) and if you want divide the price by the annual rents to come up with the GRM (Gross Rent Multiplier). (if you avg. the GRM you will see if your potential property is above or below that avg.)
- Dot Graph the numbers using excel.
- Then add a trend line.
- Compare your price and annual rents (or GRM) to see if you are in line with the trend, below the trend line (paying more for less rents) or above the line (paying less for more rents). Generally you want to pay less for more rents, that is called a good deal (relative to the market place and what other buyers are paying for in the area).
CONSIDERATION 1: RAISE RENTS
If you think you are able to raise the rents on the units because they are low at purchase, then make check to see how you will compare with the average once they have been raised. Once you have raised the rents will you be above the trend line for the price you paid? If yes, then you are getting a good deal.
CONSIDERATION 2: CONDITION
Take condition into account. Assume that what is on the trend line is average condition (which for some areas might be really good condition). So add the cost of purchase to the cost to repair to bring it up to average or good condition. Then find your place on the line and where your rents will be at that point.
Above trend, buy it! Below trend, don’t do the fix up, just buy one already finished.
CONSIDERATION 3: ID HIGHER CASH FLOW PROPERTIES
Seems natural that if you can see what everyone is paying for the rents, that you can also graph all the active properties and see who is asking the least for the most rents.
Happy hunting!
