Every day anywhere from 10 to 20 duplexes either are newly listed on the Twin Cities MLS, or have their asking prices reduced.
How can you tell which ones are good investments?
I suppose you could stop and do the math on each of them. Of course, that would take a lot of time.
Is there a shortcut?
Over time, seasoned real estate investors and Realtors use to learn two tools to quickly assess whether or not a property is likely to be a good investment: the gross rent multiplier and something called a cap rate.
While the cap rate is a useful tool for larger commercial properties, I haven’t found it to be as effective a measure on smaller multi-family units. Nonetheless, I’ll discuss the cap rate later in the week.
The gross rent multiplier is a very simple math problem. To arrive at it, just take the asking price for a property and divide it by the amount of rent a building generates annually.
For instance, if a duplex is priced at $240,000, and the MLS indicates it is receiving $24,000 in rent for the year, 240,000/24,000 = 10. The gross rent multiplier is 10.
How do you use this number?
Generally speaking, the lower the gross rent multiplier number is, the more likely the duplex is to cash flow.
So if a property has a low GRM, do I recommend a client buy it?
No. The GRM doesn’t factor any of the property’s expenses. It is simply a rule-of-thumb to determine whether or not it’s worth the time to sit down and do a complete income property analysis worksheet. Time is precious, and a property isn’t worth looking at if the numbers don’t work.
Over time, I have found that patterns emerge in the Minneapolis duplex market of what constitutes the maximum GRM a property can have to cash flow. And this number has changed in recent years.
Back when market values for property taxes were artificially under-valued, I had one set of threshold numbers. When the counties adjusted market values to accurately reflect true values two years ago, however, the result was higher property taxes. Those taxes impacted expenses, and I found that my maximum GRM figures had to change.
It is important to remember that each real estate market is unique. What constitutes a great number in Minneapolis, may not hold true in say, Los Angeles or Duluth.
The only way to figure out the right rule of thumb for your market is to either call an experienced Realtor or investor to help guide you, or sit down and do the math.