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No. of Recommendations: 14
One of the neat things I've found about the GRM is that you can compare properties with it without caring what the respecting sale prices or rents are. Now one of the things I've noticed on this board is a skepticism that property management firms are worth the fees. So I thought I'd construct a grid of break-even GRMs (the GRM at which your cash flow equals your mortgage payments) for various interest rates and percents down, and compare the self-landlording GRMs to management company GRMs.

Results first, then my method. A GRM less than the one in the table will give positive cash flow, greater than gives negative cash flow. Percent down is across the top, mortgage rate is own the side. The tables were constructed for a 15-year mortgage.

Self-Management Break-even GRMs
	0%	5%	10%	15%	20%	25%	30%	35%	40%
8.5% 4.6 4.8 5.1 5.4 5.7 6.1 6.5 7.0 7.6
8.4% 4.6 4.8 5.1 5.4 5.7 6.1 6.6 7.1 7.7
8.3% 4.6 4.9 5.1 5.4 5.8 6.2 6.6 7.1 7.7
8.2% 4.7 4.9 5.2 5.5 5.8 6.2 6.6 7.2 7.8
8.1% 4.7 4.9 5.2 5.5 5.9 6.2 6.7 7.2 7.8
8.0% 4.7 5.0 5.2 5.5 5.9 6.3 6.7 7.2 7.8
7.9% 4.7 5.0 5.3 5.6 5.9 6.3 6.8 7.3 7.9
7.8% 4.8 5.0 5.3 5.6 6.0 6.4 6.8 7.3 7.9
7.7% 4.8 5.0 5.3 5.6 6.0 6.4 6.9 7.4 8.0
7.6% 4.8 5.1 5.4 5.7 6.0 6.4 6.9 7.4 8.0
7.5% 4.9 5.1 5.4 5.7 6.1 6.5 6.9 7.5 8.1
7.4% 4.9 5.1 5.4 5.7 6.1 6.5 7.0 7.5 8.1
7.3% 4.9 5.2 5.5 5.8 6.1 6.6 7.0 7.6 8.2
7.2% 4.9 5.2 5.5 5.8 6.2 6.6 7.1 7.6 8.2
7.1% 5.0 5.2 5.5 5.9 6.2 6.6 7.1 7.7 8.3
7.0% 5.0 5.3 5.6 5.9 6.3 6.7 7.2 7.7 8.3
6.9% 5.0 5.3 5.6 5.9 6.3 6.7 7.2 7.8 8.4
6.8% 5.1 5.3 5.6 6.0 6.3 6.8 7.2 7.8 8.4
6.7% 5.1 5.4 5.7 6.0 6.4 6.8 7.3 7.8 8.5
6.6% 5.1 5.4 5.7 6.0 6.4 6.8 7.3 7.9 8.6
6.5% 5.2 5.4 5.7 6.1 6.5 6.9 7.4 7.9 8.6
Hired Management Break-Even GRMs
	0%	5%	10%	15%	20%	25%	30%	35%	40%
8.5% 3.8 4.0 4.2 4.5 4.8 5.1 5.4 5.9 6.3
8.4% 3.8 4.0 4.3 4.5 4.8 5.1 5.5 5.9 6.4
8.3% 3.9 4.1 4.3 4.5 4.8 5.1 5.5 5.9 6.4
8.2% 3.9 4.1 4.3 4.6 4.8 5.2 5.5 6.0 6.5
8.1% 3.9 4.1 4.3 4.6 4.9 5.2 5.6 6.0 6.5
8.0% 3.9 4.1 4.4 4.6 4.9 5.2 5.6 6.0 6.5
7.9% 3.9 4.2 4.4 4.6 4.9 5.3 5.6 6.1 6.6
7.8% 4.0 4.2 4.4 4.7 5.0 5.3 5.7 6.1 6.6
7.7% 4.0 4.2 4.4 4.7 5.0 5.3 5.7 6.1 6.7
7.6% 4.0 4.2 4.5 4.7 5.0 5.4 5.7 6.2 6.7
7.5% 4.0 4.3 4.5 4.8 5.1 5.4 5.8 6.2 6.7
7.4% 4.1 4.3 4.5 4.8 5.1 5.4 5.8 6.3 6.8
7.3% 4.1 4.3 4.6 4.8 5.1 5.5 5.9 6.3 6.8
7.2% 4.1 4.3 4.6 4.8 5.2 5.5 5.9 6.3 6.9
7.1% 4.1 4.4 4.6 4.9 5.2 5.5 5.9 6.4 6.9
7.0% 4.2 4.4 4.6 4.9 5.2 5.6 6.0 6.4 7.0
6.9% 4.2 4.4 4.7 4.9 5.2 5.6 6.0 6.5 7.0
6.8% 4.2 4.4 4.7 5.0 5.3 5.6 6.0 6.5 7.0
6.7% 4.3 4.5 4.7 5.0 5.3 5.7 6.1 6.5 7.1
6.6% 4.3 4.5 4.8 5.0 5.3 5.7 6.1 6.6 7.1
6.5% 4.3 4.5 4.8 5.1 5.4 5.7 6.1 6.6 7.2
Self-managed Minus Hired Management
	0%	5%	10%	15%	20%	25%	30%	35%	40%
8.5% 0.76 0.80 0.85 0.90 0.95 1.02 1.09 1.17 1.27
8.4% 0.77 0.81 0.85 0.90 0.96 1.02 1.09 1.18 1.28
8.3% 0.77 0.81 0.86 0.91 0.96 1.03 1.10 1.19 1.28
8.2% 0.78 0.82 0.86 0.91 0.97 1.03 1.11 1.19 1.29
8.1% 0.78 0.82 0.87 0.92 0.98 1.04 1.11 1.20 1.30
8.0% 0.78 0.83 0.87 0.92 0.98 1.05 1.12 1.21 1.31
7.9% 0.79 0.83 0.88 0.93 0.99 1.05 1.13 1.21 1.32
7.8% 0.79 0.84 0.88 0.93 0.99 1.06 1.13 1.22 1.32
7.7% 0.80 0.84 0.89 0.94 1.00 1.07 1.14 1.23 1.33
7.6% 0.80 0.85 0.89 0.95 1.01 1.07 1.15 1.24 1.34
7.5% 0.81 0.85 0.90 0.95 1.01 1.08 1.16 1.24 1.35
7.4% 0.81 0.86 0.90 0.96 1.02 1.09 1.16 1.25 1.36
7.3% 0.82 0.86 0.91 0.96 1.02 1.09 1.17 1.26 1.37
7.2% 0.82 0.87 0.92 0.97 1.03 1.10 1.18 1.27 1.37
7.1% 0.83 0.87 0.92 0.98 1.04 1.11 1.18 1.28 1.38
7.0% 0.83 0.88 0.93 0.98 1.04 1.11 1.19 1.28 1.39
6.9% 0.84 0.88 0.93 0.99 1.05 1.12 1.20 1.29 1.40
6.8% 0.84 0.89 0.94 0.99 1.06 1.13 1.21 1.30 1.41
6.7% 0.85 0.89 0.94 1.00 1.06 1.13 1.21 1.31 1.42
6.6% 0.86 0.90 0.95 1.01 1.07 1.14 1.22 1.32 1.43
6.5% 0.86 0.91 0.96 1.01 1.08 1.15 1.23 1.32 1.43
I think what this is saying is this:

1. Hiring management means that you cannot get as much leverage as self-managers, all else being equal. They can get the same cash flow as you on the same property borrowing at the same rate with less money down. Another way of putting it is that with the same financial resources, the investor using hired management can't touch certain properties that a self-manager can.

2. Hiring management does not mean that you can't get positive cash flow, but it does mean that you will need to content yourself with lower quality properties. If you want to profitably own upscale establishments, you will either need to cough up a lot of equity or run them yourself.

3. On the other hand, if it is true that lower class housing has more frequent problems then upper-class (I'd like your opinion on that assumption) you are at least getting your money's worth when you pay someone else to take care of the ornery stuff.

Methodology:

I made the following assumptions:

Vacancy was 10%.
Self-management expenses were 40% of net rent after vacancies.
Hired management expenses were 50% of net rent.

The formula I used for cash flow per month was:

( Sales Price / GRM ) * 90% * [60% or 50%] / 12

The formula I used for monthly payment was:
      Sales Price * Monthly Interest Rate
--------------------------------------------------
1
1 - -------------------------------------------
( 1 + Monthly Interest Rate) ^ Number Months
I set these equations equal to each other, Sales Price canceled out as expected and I solved for GRM.

- Joe
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