HUD tracks the current FMR Fair Market Rents by County in the USA so you can use the current FMR rents and the asking price on any properties you are looking at to come up with a quick comparison the GRM or Gross Rent Multiplier - good for quick comparisons and then use traditional expense analysis and cash flows to determine the Cap or Capitalization Rate before making an offer. The traditional wisdom is that real estate is not as liquid as securities so you need a higher return to offset the illiquid nature of Real Estate as well as the higher risks of ownership and liability insurances required - a good rule of thumb is take the annual rental income for an income property lets say it is $100K times .10 or a 10% cap rate equals an economic value of $1 Million - so if the seller is asking $1M or less for a $100K verified income after maintenance costs and taxes the property is yielding a 10% Capitalization Rate being the cash flow available to support financing and debt service - so clearly property condition, local vacancy rates and maintenance, operating expenses and local property tax costs all must be factored in to determine if the property is a good deal.
http://www.huduser.org/portal/datasets/f...ummary.odn
Lee County Ft Meyers Cape Coral FL
Take the annual Gross Rental income for example a single family home that rents for $1000 a month is $12K per year and if the purchase price in a recovering area is say $120K then the GRM is 10. For a while Ft Meyers and Cape Coral GRMs were just above 5 but demand was off and there were high vacancy rates which HUD tracks via Post Office vacant addresses.
http://www.huduser.org/portal/datasets/usps.html
High vacancy rates 5% to 10%+ mean it can take a while to rent at FMR and to get good tenants - anything over 10% according to USPS stats you need to look at crime rates as well because it could mean a hot spot of crack houses and crystal meth labs - if the deal is too good and way below prevailing GRMs and Cap Rates in the area beware:
http://www.foxnews.com/us/2012/06/27/met...omebuyers/
To calculate the Gross Rent Multiplier, you simply divide the Projected Rental Income (PRI) by the Investment Value (IV). For Property A, $200,000 (PRI) / $3,000,000 (IV) = 6.67 (GRM). For property B, $220,000 (PRI) / $3,250,000 (IV) = 6.77 (GRM). Since 6.77 is higher than 6.67, property A is the better investment according to the GRM.
Bottom line for single family homes or duplexes that you can buy, paint and rent a GRM of 16 or less is considered good and you should have a positive cash flow with low vacancies whereas a GRM of 20 or higher and you may be dipping into your pocket to cover monthly costs of ownership (negative cash flow) OK if it is your primary home but NOT ok for income properties.
Like I said for a while after the Sept 2008 to March 2009 financial crisis market crash Ft Meyers/Cape Coral GRMs were about 5 to 6 - whereas the Florida southeast "Gold" Coast GRMs were always higher due to demand. Except for rather high vacancy rates these were no brainer investments for properties in good condition. I always use a pro home/property inspector with a complete checklist to find things I might over look - recalled appliances - Hot Water heaters, HVAC Furnaces, ACs past useful life and needing replacement - you need to be ruthless in your offers and deduct the costs of all needed improvements including licensed labor - HVAC/Electricians/Plumbers on any repairs and deduct that from the offer price as well - unless it is a property you want to live in and will be there for years to recapture any improvements. A pro property inspection delivered through a broker now puts the broker in the position of having to give full disclosure to any buyers or loose their license or be sued - happens all the time - so it can save you serious money by bursting any banks REO values or any unrealistic sellers blue sky asking prices. That is why so many income properties have a seller financing component as the FHA has tightened up its home inspection requirements for popular FHA or VA approved loans,
OBTW Do not let your special snowflake decide to renovate everything...
Fresh Paint, new flooring etc minor repairs typically make the property more desirable - however beware having to demo and refurb Kitchens and baths and HVAC in rental properties with all new appliances/systems as it can take many years to recapture that investment in the property values. I also make sure the wells and septic systems are fairly new or hooked up to city water and sewers otherwise assume they will need to be replaced. Can be a major headache if a well runs dry or septic system clogs so first time investors safer with city water and sewer utilities. Even new subdivisions can have septic problems if the land is wet with a high water table or perc tests were fudged. If the property needs these major rehab upgrades then be ruthless and deduct the costs from the offering price including your time to manage everything - this is why so many bank REO homes are going at bargains - unless nutty offshore investors are bidding them up sight unseen to uneconomic prices.
Fall in love with the numbers and the current condition of the property and not what some special snowflake thinks would make it more cozy if you want to make a profit. If you make a realistic offer based upon the condition and the numbers and the seller rejects it time to make more offers on other properties and keep the original offer binder deposits extremely low $1 "in consideration" is all you need to make a legally binding contract until you know the owner is amenable to the offer and realistic about the condition (Most bank foreclosed REOs the banksters have never even seen the properties and vacant homes deteriorate with mold and mildew quite rapidly - many have also been stripped of copper wiring and plumbing making them basically worthless except for the land foundation and shell. An acquaintance looks for HUD foreclosures that have been stripped of copper that he can gut and renovate - likes to buy at less than $100K, invest 80K or less and sell for $300K to $400K but have to be ruthless with offers to the sellers mostly bank REO offices. And licensed Realtors MUST present all written offers. Realtors always think dumps are palaces and best to work with an investors broker who will help you get the best deals in exchange for the rental mgmt or sales listings after the renovations. Best to lease with option till the capital gains holding period lapses and you pay 20% Federal versus 39.6% federal taxes.
I have a large property I am looking at now where the owner is aging and looking to sell as he did the maintenance but it is a Trailer Home park in a nice lakes region town and can be a major headache if single moms and pensioners start bitching if I try to upgrade. Also lots of crystal meth in our working class areas - even better subdivisions - like much of the rest of America so only way it would make sense is if the owner is willing to finance with NO bank involvement and I secretly convert the properties to a 55+ retirement village only - can be a problem if established base of bikers/drugs dealers so looking into that now by some stealth recon - if any units have lots of cars coming and going all day in a quiet residential home area at times when most people working - something dodgy is up (Drugs dealing or hooking) and can spike a vacancy rate by scaring off the good renters. Towns love 55+ retirement villages because No kids under 18 allowed and no impact on expensive schools costs - most 55+ retirement villages are actually cash cows in new property taxes for most towns and cities. So we will see how it plays out.
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