I-A-Q #14: Real Estate Investing: 101
Happy Monday!
Here is an Idea, an Action, and a Question to consider this week.
Idea
A comprehensive understanding of real estate investing is overwhelmingly lacking among most agents. I’m surprised that the vast majority of agents I’ve encountered either don’t know, don’t care, or don’t care to know about real estate investing.
It blows my mind! REI is a key component to long-term wealth creation, and yet most real estate agents don’t even know the basics.
Well that ends here.
Let’s do some REI 101, shall we? We’ll start with two commonly confused terms that need some unraveling: Gross Yield vs. Gross Rent Multiplier (GRM).
Gross Yield
A term used to compare properties at a basic level to weed out bad deals quickly. It compares how much income a property can produce compared to its value. I use this method to filter a list of potential short-term rental properties to determine which I’ll analyze more deeply. I like to see a minimum of a 15% Gross Yield (i.e. If I buy a property for $500K, I want it to make at least $75K per year in gross rent).
Gross Yield = GRI/Property Price
Gross Rent Multiplier (GRM)
This calculation is essentially the opposite of Gross Yield. Where a higher number in Gross Yield is better, a lower GRM indicates a higher potential for larger returns. For example, I like to see a maximum of GRM of ten.
GRM = Property Price/GRI
GRM is the term more commonly used amongst investors, but personally, I prefer to use Gross Yield when I’m analyzing a large group of properties. I liken using Gross Yield to cutting with an ax before measuring with a micrometer: Gross Yield is my larger ax cut before I start digging into the weeds of a full- blown analysis.
Action
This week: Analyze one property per day using either Gross Yield or GRM. See if this analysis is helpful as a big-picture filter for you.
Question
If you have 1,000 properties to analyze, what do you like to use as your big-picture filtering system?
See you next week,
Matt “Roar” Gardner
Real estate investor-agent, Author of Supersonic Real Estate: Light Your Afterburner to Accelerate Your Investor-Agent Career (Coming Soon!), and keynote speaker
