# Research Tools for Real Estate



## Fain (Oct 11, 2009)

Am thinking about buying a duplex/triplex rental property soon. What sites/research tools have people used when analysing a real estate investment?


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## Just a Guy (Mar 27, 2012)

Www.easysafemoney.com. 

His book includes property analysis forms as well as a good philosophy on how to buy smart.


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## Rusty O'Toole (Feb 1, 2012)

After 40 years investing in real estate the most important analysis tools I know are GRM and cap rate. 


GRM is gross rent multiplier. Take the gross annual rent and divide it into the price. The lower the figure the better for you. The break even point is around 6.5 or 7. 

The lowest I have seen was 3.14 ( I bought a distressed 6 plex under power of sale in the early 90s. It was a solid money maker for years even though I had 100% financing)

The highest I have seen is 16. I know someone who paid that much at the height of the 80s boom. Needless to say he lost his shirt.

Cap rate or capitalization rate is a more sophisticated version of the same thing.

GRM has the advantage that even the dumbest real estate agent or owner knows the rent and the price. With a little practice you can do the math in your head and analyze a property half drunk at a party.

Cap rate gives you a more accurate figure. 

Incidentally the 2 do not vary much from each other. I have never seen a good deal that didn't look good both ways, or a bad deal that did. The one confirms the other. An iffy or mediocre deal might look better one way than the other, in that case go by cap rate, it is more accurate.

Another thing. I never buy negative cash flow properties. Unless it is one I can fix up and turn around in under a year, and then the price better be very low or it is not worth my while.

Only buy positive cash flow or at worst, break even. And this includes all debt service including interest on your down payment. You deserve to make something on your money, or you might as well put it in the bank.

Following these rules will keep you out of the market when there is a boom on and everything is overpriced, and will force you to buy when things are on sale. Everyone knows you are supposed to buy low and sell high but they don't tell you how. 

Now you know how.


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## Rusty O'Toole (Feb 1, 2012)

Example of GRM:

You are looking at a duplex. One side rents for $1200 a month the other rents for $1300 (it has a garage).

Total $1200 + $1300 = $2500 per month. $2500 X 12 = $30,000 per year.

Price of property, $500,000

$500,000/ $30,000 = a GRM of 16.66 = VERY negative cash flow, do not buy.

What would be a good price? GRM of 7 X $30,000 = $210,000. That is the most you could pay and have a chance at break even or positive cash flow.

If that is impossible to get in your area you might as well forget about real estate investing. At least the kind where you buy and rent for long term cash flow and appreciation.


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## sags (May 15, 2010)

Does the same apply for buying over renting?

If we pay 12,000 per year for a townhouse worth 150,000..............the GRM is 13-14.

It would appear that renting is a bargain......especially when it includes everything but hydro (gas furnace and hot water heater).

I guess that ends my thoughts of buying again.


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## Rusty O'Toole (Feb 1, 2012)

I would say your landlord is subsidizing you to the tune of several hundred dollars per month. This is more common than most people know, and it gets worst (better for the renter) the more expensive the property.

The GRM formula does not work the same in times of really low interest rates. If your landlord has a mortgage at 3% he will save some money and get closer to break even. 

To know for sure you would have to know all expenses like condo fees, insurance, taxes, repairs, and also mortgage payment and mortgage interest (if you want to be real accurate you only count interest as an expense, not the whole payment which includes principal repayment)


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## Berubeland (Sep 6, 2009)

http://www.milliondollarjourney.com/landlord-math-cap-rate-and-return-on-investment.htm You can download a cap rate spreadsheet in the body of this post.


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## HaroldCrump (Jun 10, 2009)

Rusty, do you use that GRM formula on the current value of the property, or the value originally acquired for?
In your example of current gross rent of $30,000 and current value of $500K, but if the property was originally acquired for $300K, what would you use?


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## andrewf (Mar 1, 2010)

Current value is the only logical measure. If you wouldn't buy at today's prices by a significant margin, doesn't that suggest you may want to sell?


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## Just a Guy (Mar 27, 2012)

Why sell if you can't generate the same returns. Current value is just an extra return on investment. Steady cash flow is hard to find these days, why sell and get 2-3%?


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## none (Jan 15, 2013)

Just a Guy said:


> Why sell if you can't generate the same returns. Current value is just an extra return on investment. Steady cash flow is hard to find these days, why sell and get 2-3%?


Because by selling you would make far far more than 3% assuming the invetiable correction.


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## Fain (Oct 11, 2009)

Rusty O'Toole said:


> After 40 years investing in real estate the most important analysis tools I know are GRM and cap rate.
> 
> 
> GRM is gross rent multiplier. Take the gross annual rent and divide it into the price. The lower the figure the better for you. The break even point is around 6.5 or 7.
> ...


Thank you Rusty, do you use any other metrics at all? Vancancy rates, average rents any other ratios or multipliers/rules of thumb?


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## Just a Guy (Mar 27, 2012)

none said:


> Because by selling you would make far far more than 3% assuming the invetiable correction.


Well, I just bought a place for $73,000 which generates $1,600/month in rent (closed last month). The bank just sent in an appraiser who said it was worth about $150k, so we got a mortgage on the place for $112.5k. The extra 40k we will use for the down payment on a different property we just bought for $73,000 which generates $1000/month. We plan on getting it mortgaged as well to buy another cash flow property.

According to your theory, I should cash out and take the 75k profit on current value instead of leveraging the 40k and getting a steady cash flow which cost me nothing from my own pocket. Even if the housing corrects, I don't plan to sell as long as the cash flow is paying everything. 

I suppose it all boils down to investing Philosophies... 

Now, I do admit, this won't work if the property costs 2-500k like most of the proposed example "investment" ideas we read here, but these deals do exist, and I'm not the only one on this board finding them. However, they are not common enough for me to cash out on them either.


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## none (Jan 15, 2013)

It's hard to beat buying a place at 50% appraisal. I was working under the assumption you were paying market rates. How did this even happen? What prompted the seller to sell the place at 50% off? I don't get it.


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## Pluto (Sep 12, 2013)

andrewf said:


> Current value is the only logical measure. If you wouldn't buy at today's prices by a significant margin, doesn't that suggest you may want to sell?


My view is you always use what you actually pay, not current value. GRM is to evaluate the actual deal, not a hypothetical one. If the original cost was 300k, and the current value is 500k, a potential new buyer would use 500k, and the current gross rent. The current owner uses 300K and current rent. 
The difference between the cost (300k) and current value (500k) is just an opportunity (for capital gain). He would likely only want to go to all the trouble and expense of selling if there was a better opportunity readily available. 

The GRM is similar to a P/E ratio in stocks. It's how much you pay to get a dollar of earnings. The conventional wisdom is, the lower the better. In a city with rising population, high demand for real estate, and not much land, getting a reasonable GRM is unlikely. Prices of property far outstrip what renters can pay, so the GRM is sky high. Even so, there seems to be plenty of real estate investors in the high priced areas. The strategy there seems to be to go for the capital gain, not the dividends, so to speak. The measly rental income, relative to purchase price, is just to pay some expenses while waiting for the next up leg in prices. It's a buy high, sell higher strategy, in which timing is everything. You need to know the range of GRM for your particular city. For instance, in a pricey city the range over many years - far enough back to include one or two recessions - might be a low of 10 and a high of 17. In that case, you would know 10 is about as good as it's going to get. But in a more modestly priced city, the range could be 5.5 to 12. Typically, in a modestly priced city, you don't get the stellar capital gains, but probably easier to get positive cash flow. It is some what analogous to stocks: The high flying, high p/e stock in which the goal is capital gains and timing is everything, vs the conservative dividend paying stock.


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## none (Jan 15, 2013)

^ this is not the right way to do it.

Current value is current value. Then again, I have people like you to thank for my rent being well under the market rate - thanks!


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## Pluto (Sep 12, 2013)

none said:


> ^ this is not the right way to do it.
> 
> Current value is current value. Then again, I have people like you to thank for my rent being well under the market rate - thanks!


"Current value is current value" is a meaningless statement. It's like saying 1 = 1. So I don't get your point. Perhaps you could give more detail on your reasoning. 
Glad to hear you are enjoying low rents, however. Even so, your landlady might be laughing all the way to the bank.


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## none (Jan 15, 2013)

Pluto said:


> "Current value is current value" is a meaningless statement. It's like saying 1 = 1. So I don't get your point. Perhaps you could give more detail on your reasoning.
> Glad to hear you are enjoying low rents, however. Even so, your landlady might be laughing all the way to the bank.


1 =1 is far from a meaningless statement - it's a irrefutable fact, but I digress.

AS far as my landlady goes, nothing could be further from the truth. She's been unable to afford to renovate the downstairs apartment for the last two years and consequently it's remained empty. If she sold 2 years ago she would be almost 100K richer and not scraping pay cheque to pay cheque.


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## andrewf (Mar 1, 2010)

Pluto, if you only use original cost, and rents rise over time, doesn't your GRM tend toward 0? And as a valuation tool, how do you use it to determine whether it's a good time to sell?

GRM is supposed to be an objective measure of the value of a property, like P/E. So how can your GRM for property A be different than someone else's GRM for the same property? It's like saying my P/E for CIBC stock is 2 because I bought it back in 1992. It's totally useless as a valuation tool.


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## Just a Guy (Mar 27, 2012)

none said:


> It's hard to beat buying a place at 50% appraisal. I was working under the assumption you were paying market rates. How did this even happen? What prompted the seller to sell the place at 50% off? I don't get it.


Yes, this may have been one of the best deals I ever made. In this case it was a foreclosure. Fortunately, they had stripped it down to bare walls and floors. A week to paint and lay down flooring, cost me $1500 in materials and I had it rented the next day. 

People are so convinced there is nothing on the market that there is little competition. That, and being able to give an unconditional offer.


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## marina628 (Dec 14, 2010)

I have 6 properties under contract in Atlanta now and projected cap rates 17-22%.Toronto OR Vancouver you can forget for investment properties but still good options out there.My friend started out a couple years before me buying in Vegas and Georgia so her contacts made it easy for me to do these things.We are seriously considering sell all our Ontario properties in next 2-3 years and buying more in USA.


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## none (Jan 15, 2013)

^ this makes perfect sense. ^


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## andrewf (Mar 1, 2010)

Yes. If you own a property that is worth a lot more than you would pay for it, sell and buy something more reasonable.


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## Addy (Mar 12, 2010)

Marina mind sharing what you do for Atlanta? Are they commercial properties or residential? And do you have any recommendations for realtors or property managers in Atlanta? For now I just want to gather info but we may get serious if things look that good to have a 17%+ cap rate.


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## Rusty O'Toole (Feb 1, 2012)

HaroldCrump said:


> Rusty, do you use that GRM formula on the current value of the property, or the value originally acquired for?
> In your example of current gross rent of $30,000 and current value of $500K, but if the property was originally acquired for $300K, what would you use?


It's a tool. You use it as you would any tool.

About the only time I used it was when looking for property. I would use it as a filter before I looked at a property and before I even asked the agent or seller for detailed financial information. As I said, the dumbest seller or agent can tell you the rent and the price. From those I could tell if the property was a stinker or if it was interesting. If the GRM was way off, like 10 or more, I wouldn't bother looking farther. If it was under 8 I was definitely interested.

I did quote one GRM of a property I bought in 1994 or 95 (3.14). That was the GRM when I bought it. I quote it for historical interest, it has no relevance to anything today.

Incidentally when I first saw the ad for that property I thought the GRM was between 7 and 8 which wasn't that exciting at the time. But I thought I could get it cheaper because it had been on the market a long time. Imagine my surprise when I found out there were 2 basement apartments the agent forgot to mention, the electric was separately metered (savings to me, as the tenants paid their own hydro) and a few other errors which made the property a much better buy than the ad indicated.

If I were selling I would work out the GRM and try to set a price in line with the going rate. A lot of investors use the GRM and cap rate (all the smart ones) so if your price is too far out of line you are not going to get any offers.

The GRM is just a rough rule of thumb. There are more detailed, more accurate ways of getting at the same thing. By that I mean cap rate. It is the equivalent of interest rate on a bond, or dividend on a stock. You should keep an eye on your cap rate as you would on any other investment return.


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## Rusty O'Toole (Feb 1, 2012)

Fain said:


> Thank you Rusty, do you use any other metrics at all? Vancancy rates, average rents any other ratios or multipliers/rules of thumb?


Not really. You have to use your common sense, and know what values are. For example if you are looking at a house and the agent says you can rent it for $1500 easy, but you happen to know similar houses are renting for $1000 you won't get taken in.

I like to take a clipboard when looking at a property and make notes of what repairs are needed. Later estimate the cost of repairs, even phone some contractors and ask what they think they will cost. Otherwise it is too easy to underestimate what it will cost to get a property in good shape.

It is not a business you can pin down to the penny. There are always unexpected expenses. I'm sure I would have done better if I could have reduced everything to figures but I never had much of a head for math.


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## Rusty O'Toole (Feb 1, 2012)

HaroldCrump said:


> Rusty, do you use that GRM formula on the current value of the property, or the value originally acquired for?
> In your example of current gross rent of $30,000 and current value of $500K, but if the property was originally acquired for $300K, what would you use?


In case the previous answer was confusing. The only time I use GRM is to figure if a property is worth buying and then only as a first filter. If the property is interesting I will get more detailed information and work out the cap rate.

I will also figure it out when selling a property because I know other investors use it and I need to be in line with the going rate if I want to get offers.

Those are the only times I use it.

You always use the price and the rent of the same time, otherwise it wouldn't make sense.


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## Pluto (Sep 12, 2013)

andrewf said:


> Pluto, if you only use original cost, and rents rise over time, doesn't your GRM tend toward 0? And as a valuation tool, how do you use it to determine whether it's a good time to sell?
> 
> GRM is supposed to be an objective measure of the value of a property, like P/E. So how can your GRM for property A be different than someone else's GRM for the same property? It's like saying my P/E for CIBC stock is 2 because I bought it back in 1992. It's totally useless as a valuation tool.



1. I don't believe there is an objective measure of the value of anything: The key word you used is "supposed". Suppositions are assumptions that shape the conclusions, so the conclusions can not be objective. 
2. Basically I use GRM as a potential buyer to evaluate how much I would pay to get the estimated earnings. After I bought, I don't really care what the GRM is. However, if I considered selling, I would, as you suggest, recalculate the GRM based on current rents and market value to see what the deal would look like to a potential buyer. If the GRM is really high, I (or you) might think it is a good time to sell especially if there was a better alternative for the cash, but the buyer might not like the high GRM. A savvy buyer might walk away. Generally I think it is wise, due to costs of buying and selling, to hold and collect rents as long as possible. Selling just because the GRM became high is only a good idea if you have a better use for the money. So to me, GRM is primarily useful from the point of view of a buyer.


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## andrewf (Mar 1, 2010)

Pluto, if you only use GRM (based on your purchase price) when you buy the property only and then disregard it thereafter, I think we agree. It doesn't have any bearing on your future decisions after you've acquired the property.


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## dBII (Mar 12, 2013)

This is really interesting reading. Thanks Just a Guy, Berube and Rusty. Now that I have back-calculated the GRM on my 3 rentals, it seems that I have already crashed and burned in the landlord game, even before I earned my training wheels. The GRM for my three rentals are 9.5, 10.5 and 11.4. In my local market (Central Van Island), it is really difficult to find investment properties that aren't driven up by the market. I don't understand why gross rent is used in the GRM calc. For instance, if I were to purchase a rental, say, in the US, it means that I would need property management, out-of-town contractors and be subject to vagaries of which I have no control - unlike owning and monitoring my local properties. In your opinion, am I better off sacrificing GRM values in lieu of being able to maintain a "hands-on" approach?


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## Just a Guy (Mar 27, 2012)

Wanting to be an investor is not the same as being an investor. Part of being an investor is buying at the right time (or right price), not forcing it. You need to recognize opportunities or seek them out. Now, it's a hard time to find good investments in real estate, the prices are inflated beyond the levels where you can make money, so you can't buy.

The same is true in the stock market...you can buy Apple today at $500, but the chances of making money are slim, you had to buy when it was cheap. Real estate is the same, you have to be patient. Everything people have been telling you helps you to find the deal. Today they are rare, you'll have to wait...if you don't, or try to take short cuts, you'll lose your shirt. Wanting to make money when there isn't any to be made will make you lie to yourself to justify it. Trust the numbers, they don't lie.

There are properties out there, everywhere, I've been buying a few every year lately, but I screen through hundreds if not thousands that get rejected.

Also, always factor in your time.


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## Berubeland (Sep 6, 2009)

First of all you are learning, and that costs money. If you were to pay for university or college it would cost you a few bucks so just roll with it. What you have done is create a situation for yourself where it is extremely difficult to make money (from the rent). The first step to solve the madness is to admit what the reality of the situation is. The second step is to resolve to aggressively increase income on those properties and create value. How you can do it I don't know, but from now on you are seeking to improve the cash flow on those properties. 

As for using Gross Rent and doing all the work yourself I understand that there can be savings, but this is where your life gets really unpleasant. I hire guys who turn over a property in 2-3 days but it will take the average landlord over 1 month to do the same work, meanwhile the vacancy costs are piling up. You as well have to be paid. Otherwise you will be very unhappy when you are the guy shovelling snow in twenty below "to save money" while your tenants sit all toasty warm. 

So even if you are in town to say a place is profitable you have to pay yourself and any family you can guilt into helping you


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## marina628 (Dec 14, 2010)

Just a Guy is right on the money ,you have to do your homework and realize a Gem when you see it. I bought a house about 4 years ago that was a power of sale and the bank had one offer but the buyer wanted tenants out so he would move in.My agent told me the only way I could get it was to agree to all the bank conditions ,closing and I had to keep he tenants.My agent managed to get in the house and took photos on her cell phone with listing agent present.I did not even get a viewing but I signed it back with all conditions the bank wanted and $13,000 less than asking price.I had no clue what sort of people were in there could not even get credit check on the tenants but the house was pristine shape so I took a gamble.One of best investments I ever made.
We have three now in USA we have never seen just the agent sending us photos and they got us the tenants.Recently we were looking to close in Florida and thought we found a property but the expense report the seller and agent provided to us omitted at least $5000 a year in expenses.I believe if it is meant to be it will be so I never push on investment properties ,something else is around the corner.


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## Rusty O'Toole (Feb 1, 2012)

dBII said:


> This is really interesting reading. Thanks Just a Guy, Berube and Rusty. Now that I have back-calculated the GRM on my 3 rentals, it seems that I have already crashed and burned in the landlord game, even before I earned my training wheels. The GRM for my three rentals are 9.5, 10.5 and 11.4. In my local market (Central Van Island), it is really difficult to find investment properties that aren't driven up by the market. I don't understand why gross rent is used in the GRM calc. For instance, if I were to purchase a rental, say, in the US, it means that I would need property management, out-of-town contractors and be subject to vagaries of which I have no control - unlike owning and monitoring my local properties. In your opinion, am I better off sacrificing GRM values in lieu of being able to maintain a "hands-on" approach?


You don't sacrifice anything. If the investment does not make a profit don't buy it, period.

Look at it this way. Suppose you were thinking of buying a stock. Someone told you Murgatroyd Bon Bon was really doing well and was going to double by the end of the year.

So you take a quick look at Murgatroyd Bon Bon and see the P/E is 100

You already know that 10 or 15 is an average P/E. The smartest investment you ever made, was a stock that was selling at a P/E of 5. Any time you bought a stock with a P/E over 20, it was chancy.

Would you buy a stock with a P/E of 100? NO

Would you buy a stock if all you knew about it was the P/E? NO

The P/E of a stock is like the GRM of a property. It tells you something about the stock but it does not tell you everything. It will save you a lot of time by weeding out the stinkers and leaving the ones worth looking into.

By the way you did not crash and burn. You just bought some properties that probably don't have positive cash flow. I don't think you have been able to get positive cash flow in your area since 1970 so you are in the same boat with a lot of people. I don't buy negative cash flow properties myself but I know people who have, and made money.

Just like a stock with a P/E of 100 could still go up more. It's not the kind of investment I am comfortable with but a lot of people must buy stocks like that or they wouldn't keep going up.


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## Just a Guy (Mar 27, 2012)

Rusty O'Toole said:


> By the way you did not crash and burn. You just bought some properties that probably don't have positive cash flow. I don't think you have been able to get positive cash flow in your area since 1970 so you are in the same boat with a lot of people. I don't buy negative cash flow properties myself but I know people who have, and made money.
> 
> Just like a stock with a P/E of 100 could still go up more. It's not the kind of investment I am comfortable with but a lot of people must buy stocks like that or they wouldn't keep going up.


This is a great example of the difference between INVESTING and GAMBLING. As rusty points out correctly, BOTH can make you money.


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## dBII (Mar 12, 2013)

Just a Guy said:


> This is a great example of the difference between INVESTING and GAMBLING. As rusty points out correctly, BOTH can make you money.


I don't have any reservations about my choice. It may not be stellar in terms of profitability, but I like the hands-on part and the simplicity of it all. I certainly would make better choices if I wanted to do this again with my new-found understanding.


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## alingva (Aug 17, 2013)

http://moneyinside.ca/calculators.shtml has several calculators, CIBC has an app to compare value of properties id different cities/neighborhoods https://www.cibc.com/ca/features/home-advisor-app/home-advisor-iphone.html


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