Audios Gross Income Multiplier

It's a simple formula for determining the value of rental real estate has been around for ages.

GIM is the acronym for gross income multiplier, of course, and the formula is this:
Price/Gross Annual Rent=GIM

It used to be a rule of thumb that you could figure out if a property was worth acquiring if you didn't pay mroe then 8 times the annual rent collected. That was THEN....now we use Cap Rates. For those who don't understand CAP rates see the example below helps you understand the New Improved Way to do a "Valuation".
Grab your handy dandy FRIEND.... Hp12csm

Begin with the Gross Income(GI) of a property and subtract all Expenses(E), but not loan payments.
GI-E=V

Example:

1. Gross income=$80,000 per year, and the expenses are $34,000, you have net income before debt-service of $46,000. To arrive at an estimate of value, apply the capitalization rate to this figure.

Let's suppose the normal capitalization rate is .10 in your area, meaning investors expect a 10% return on the value of their investment. You can use your own rate, of course, but if others are paying more you may have a tough time buying anything.

2. Now divide the Net Income(NI) of $46,000 by .10, and you get $460,000 - the estimated value of the building. With a cap rate of .08, meaning an 8% return, the value would be $575,000.

To come up with the CAP Rate using the asking price of a property, just divide the net income(NI) by the asking price. For example, if a seller wants $675,000 for a property, and the net income is $55,000 you would divide 55,000 by 675,000. This gives you a cap rate of .81.

Value=Net Income(Before Debt-Service)/Divided by CAP Rate

The forumla isn't too tricky, but be sure the seller gives you ALL the normal expenses, and doesn't exaggerate income. Suppose he stopped repairing things for a year, and is showed "projected" rents, instead of actual rents collected. The income figure could be $15,000 too high, which would cause you to estimate the value at $187,000 more (.08 cap rate). Ouch!

Smart investors sometimes separate out income from vending machines and laundry machines. If these sources provide $6,000 of the income, that would normally add $75,000 to the appraised value (.08 cap rate). However, you can do the appraisal without including this income, and then add back the replacement cost of the machines, which is probably much less than $75,000.

Of course if you are competing to buy properties based on the same cap rate used by others, but you have to borrow at higher interest rates or buy with less of a down payment, you could have cash flow problems.
No simple valuation formula is perfect, and all are only as good as the figures you plug into them!

__________________
Paige A. Rausch
Cellular: 239-691-4321
paigerausch@earthlink.net
http://activerain.com/astepahead