Real estate investors: what does GRM mean? What about the 1% rule, 2% rule, 50% rule? HELP!

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Real estate investors: what does GRM mean? What about the 1% rule, 2% rule, 50% rule? HELP!


Indy Anna explains…
– What does GRM mean, how to calculate it and why it is important.
– How to determine if a property’s GRM is “good” or not.
– A few other factors that you want to consider.

What is the gross rent multiplier (GRM):
– This is the number of years it would take a property to pay for itself if all of the rent was paid and there were no expenses.
– For example if a property has a GRM of 10 that means it would take 10 years for the rent to pay for the property if there were no expenses
– But there will always be expenses so is this pointless? No, because it is a quick tool to evaluate and compare on property to another one, which is how all real estate is valued.

How do I calculate the GRM:
– You take the purchase price of a property and divide it by the gross yearly rent.
– So if a property is selling for $200,000 and it makes $20,000 a year in gross rent then $200,000 / $20,000 = 10. The GRM is 10, it will take 10 years for the gross rent to pay for the property.
– Make sure to take Azam’s Math Class because you can do this calculation quickly in your head and it will impress people lol.

What is the gross rental income:
– This is the TOTAL rent that comes in from the property this is BEFORE any and all expenses.
– The GRM and gross rental income does NOT include taxes, insurance, vacancy, repairs, debt service (mortgage payments), utilities or ANY other cost.
– This assumes a fantasy world where every dollar that comes in from rent goes directly to your pocket, so it is an unrealistic number that should only be used to compare properties and not actually project your cash take.

What is the 50% Rule?
– This is much more realistic look at how much money you’ll actually make with the property, the 50% rule says that whatever the rent for a house is, it will cost you 50% in expenses.
– So if a property rents for $2,000 a month then you will, on average, spend $1,000 a month in various costs and expenses. This will normally last for about five years and then your ratio will improve.
– This is a widely used number by banks, lenders, investors and many others in real estate. This is why for many landlords you should project based on 50% of the rent being eaten up in expenses for the first five years and if that’s a problem you may not want to do the deal.

What is the 1% rule?
– This means that if an investor wants to buy a property it should rent for at least 1% of the purchase price.
– So if you buy a house for $100,000 it should rent for at least $1,000/month. This is less likely to happen the more expensive the house is, so a $500,000 house is unlikely to rent for $5,000 a month.
– The 1% rule is typically only for homes in the $50,000 – $300,000 range.

What is the 2% rule?
– This says that an investor should buy a house that rents for 2% of the purchase price.
– This means if you buy a house for $40,000 it should rent for $800. That is doable, but once you get to prices like $150,000 this is not feasible because a $150,000 is not likely to rent for $3,000 a month.
– Indy is one of the ONLY places in the country where you have find 2% houses, I’ve got plenty so email me Love @ and I’ll see how I can help.

Summary and Recap:
– The GRM is the gross rent multiplier and you calculate it by diving the purchase price by the yearly GROSS rent so this does not include any expenses. The GRM tells you how many years it will for a property to pay for itself.
– The 1% rule says you should buy a $150,000 that rents for at least $1,000 a month right? Not it is $1,500. Just take the purchase price and take two zeroes away and that should be rent according to the 1% rule.
– The 2% rule works the same way, take away two zeroes and multiply by 2. So a $30,000 house should rent for at least $600/month. There are only certain places in America you’ll find these deals, usually in the Midwest.

Hope that helps if you have any more questions you can email me below.

Thanks so much! = )

Make the Universe Smile…

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Thanks so much!  = )

Make the Universe Smile.

~ Indy Anna
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