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Subject:  Re: FAQ Date:  5/25/2003  3:25 PM
Author:  madmarv Number:  3165 of 14304

I've been collecting links to several of the threads I found useful. I thought about putting it together as a FAQ but it's not that complete. I only managed to read through the first couple hunderd posts on this before I gave up. You can probably find a lot of good posts by sorting by recs.

Beginner RE investor tips:

Maintenance Costs

Downside of Leverage:

Condo thread:

jiml8 on RE bubble

Creative financing:

Breakeven GRM rates:

Sample analysis


I also copied some notes before I started collecting the links:

Reading list:

Robert Allen "No money down for the 90's", "Creating Wealth"

Price of building/Total gross rent for one year = Gross Rent Multiplier.

GRM is a quick and dirty method to value a building. Lower numbers equate to stronger cash flow. There is a crude relationship to market capitalization rate, which a bank will use, but GRM doesn't consider the details (such as cost of utilities, and likely vacancy factor) but only compares rents to purchase price.

Roughly speaking, GRM < 3.5 is slum valuation (or a very good deal on a non-slum building)

3.5 < GRM < 6 is a fairly low class neighborhood, or a building in a state of disrepair in a decent neighborhood.

6 < GRM < 7 is a decent building in a decent neighborhood. Working class neighborhood, nominal vacancy factor.

7 < GRM < 8 is getting a tad pricey; moderately upscale neighborhood, low vacancy factor. Tenants include some professionals.

8 < GRM < 9.5 high priced neighborhood. High rents, hopefully low vacancy factor, high growth. Easy to achieve a negative cash flow with this kind of building; the plan is to get capital appreciation in a high growth area.

9.5 < GRM Boom area. Sucker bait, IMO. Negative cash flow virtually assured, with the expectation of high capital appreciation. The risk is that the boom will bust (which happens periodically in real estate).


Hi everybody...

I am a lurker here on this board, but I have a question now that I am curious about.

I see various ads in papers concerning income property that states some number as CAP. I don't know what CAP is, and was curious as to it's meaning and relevance.

e.g., here's a recent ad that I saw:
32 unit apt. 11.23 cap °$1,400,000

Thanks for any info!



I believe what they are telling you is that you will have an 11.23% annual return on the purchase price. That is to say that the Net Operating Income (NOI) has been/will be $124,666 per year. NOI is the net income before non-operating/non-cash items such as interest on the mortgage and depreciation which is a non cash expense. 11.23 is a pretty low CAP rate very nice properties often go between 9.5 and 10.5. BTW that $124k is what you have left over to pay for the mortgage and significant capital expenditures. Maintenance and such should already be included in the calculation of NOI.


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