Gross rent multplier

I believe that a lot of the “investment”
purchases currently being made in our market do not conform to the statements
quoted below, but are based purely on the speculative hope that values increase
rapidly.

…”For me, and most
economists, the test of any asset being overpriced would be the yield (ROA) on
the asset vs. the risk of holding
it.

The yield on a house would be
it’s gross rents (monthly rent less how long it is empty) less cost of ownership
(taxes, insurance, repairs etc.) divided by it’s purchase cost. Many real
estate investors compress this simply into a GRM, gross rent multiplier which is
gross rents over purchase price to evaluate
property.

…Look at rents in
relation to purchase price to test if the property is overpriced or
not.

…EVA, ecnomic value added, the
source of all true profits tells us that the value a firm creates is based on
the spread between their cost of doing business and economic rents.

I believe that a lot of the “investment”
purchases currently being made in our market do not conform to the statements
quoted below, but are based purely on the speculative
hope
that values increase rapidly. The following is taken from a discussion at the
Motley
Fool
.

“For me, and most
economists, the test of any asset being overpriced would be the yield (ROA) on
the asset vs. the risk of holding it.

The yield on a house would
be it’s gross rents (monthly rent less how long it is empty) less cost of
ownership (taxes, insurance, repairs etc.) divided by it’s purchase cost. Many
real estate investors compress this simply into a GRM, gross rent multiplier
which is gross rents over purchase price to evaluate property. This tool is a
good fast way to look at property.

Look at rents in relation
to purchase price to test if the property is overpriced or not. A general rule
of thumb is buying with a GRM under 10 is a deal that can make sense and is
worth looking into more.


EVA, ecnomic value added, the source of all true profits tells us that the value
a firm creates is based on the spread between their cost of doing business and
economic rents. A landlord primary cost of doing business is their cost of
capital, which is driven by their mortgage. Focusing on that, and your places
rent/purchase price ratio is how your going to make
money.”

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