When looking to invest in a duplex, many Minneapolis duplex buyers have a quick rule of thumb they use to eyeball financial information on a property to decide whether it’s a good deal.
For some, that measure is the Cap Rate, which is a ratio of an income property’s net operating income to its fair market value.
Other duplex investors may use the Gross Rent Multiplier, which is a number determined by dividing the fair market value (usually purchase price) by the gross amount of revenue a property generates in a year.
A close cousin of the gross rent multiplier is the Rent-To-Value Ratio. This ratio takes the Gross Monthly Rental Income and divides it by the Fair Market Value of a property. So, if a duplex generates $2000.00 a month in rent, and its purchase price is $200,000, the Rent-To-Value Ratio would be 1 percent.
Many investors believe as long as you have at least a one percent Rent-To-Value Ratio, the property will cash flow. However, it’s important to note a couple of things.
First, this number may be impossible to achieve in many of the more expensive markets across the nation.
Second, like the Gross Rent Multiplier, the Rent-To-Value Ratio fails to take into account one very big consideration: expenses!
Some properties have higher property taxes than others, some require the owner to pay heating bills, and some have so much deferred maintenance that repair bills will skew expenses.
Like the other measures, the Rent-To-Value Ratio is only an eyeball test.
You should never buy a Minneapolis duplex without doing a complete financial analysis, and asking the seller to provide the data necessary to back your math up!