The MrRental Blog Archives

Attracting Tenants

by Jes Herman May 25th, 2010

Attracting the right tenants to your property is very important. Once you attract them you need to put them through your screening process, but are you attracting the right people? To do this, write down your ideal tenant. Are they professionals? Students? What is their ideal age? Do they have kids? Are they quiet? Write down everything you can think of that describes your ideal tenant.

Now that you have defined the kind of tenant that you would like to see in your rental property, you have to identify the places where you’ll find your tenant. There are many ways to advertise your vacant unit, however, targeting your ideal tenant may require a different strategy. Perhaps you want to target retirees who are receiving pensions or government cheques because they have a steady stream of income to pay rent. In this case you could advertise at local senior centres, legions, or even churches. Or, maybe you prefer renting to foreign workers, so advertising at local businesses and HR departments may be a good idea.

The point here is to get creative and become proactive. Don’t just sit there and hope that someone will call you from a newspaper ad. Go to them!

1. define your ideal tenant
2. Identify the best marketing strategy for attracting your ideal tenant
3. Execute your marketing strategy!

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Cap Rate

by Jes Herman May 17th, 2010

The capitalization rate, or “cap rate,” is the ratio of net operating income (NOI) to purchase price. To calculate the cap rate, simply divide the NOI (income after all expenses, but does not include any debt service) by the purchase price.

Cap rate = Net Operating Income / Purchase Price

For example, a building with a NOI of $50,000 and a purchase price of $500,000 would have a cap rate of 10.

Cap rate = $50,000 / $500,000 = 0.10 = 10%

You can also work this calculation in reverse. If you are selling a property and your NOI is $65,000, for example, and the going cap rate for your market is 9, what is your property’s value?

Value = NOI / Cap rate
Value = $50,000 / 0.09 = $555,555

Historically, the average cap rate has been ten. If you are a seller, you’d like to get your cap rate below that. If you are a buyer, you want to get above that. Keep in mind, however, that while this valuation method is the measurement for commercial properties, it is rarely, if ever, used for valuing residential properties.

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Gross Rent Multiplier Formula

by Jes Herman May 3rd, 2010

The Gross Rent Multiplier (GRM) formula is an “income” approach of determining the value of a rental property. It’s a formula that measures the gross annual rents relative to the purchase price, and it’s a great way to compare income producing properties. The GRM does not, however, take into consideration any debt servicing, taxes, or operational expenses, but it can help you estimate how much your rental property is worth today, and how much it will be worth if you raise the rents. To calculate the GRM, simply take the purchase price and divide it by the gross scheduled annual rents.

GRM = Purchase Price / Gross scheduled income

So, if a property just sold for $100,000 with annual rents of $10,000, the GRM would be 10. In other words, the purchase price is ten times the annual rents. When you know the GRM you can use it to determine the value of a rental property. In the example earlier, let’s say that we purchased that property for $100,000 and we are getting $10,000 in scheduled gross annual rent. Since we know that the GRM is 10, we can determine how much our property can be worth if the rent were increased. Let’s say our rent increase now gives us $12,000 per year. That slight rental increase can have a huge impact on the value of the property.

Property Value = GRM x Gross scheduled income

Our example shows that a $2,000 increase in annual rent, with a GRM of 10, will increase the value of the property to $120,000! That’s a $20,000 increase!

Determining the GRM for your property is not isolated to that property, you want to find out what the GRM is in *the area* of a given property. Your property might be a 10 however the area average could be higher or lower. The point is that you want to have an accurate GRM for your property and that requires a little due diligence so that you know the GRM rate in *your* area. That being said, the GRM is a great way to compare your rental property to the market. But again, the GRM has limitations so it’s important to know what they are when you are using the GRM formula.

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