Buying a home is an emotional experience and choosing the home you purchase often involves a decision based on emotion and reason.
Investing in residential or multi-family property however is best done by looking at the numbers to determine if it is a good investment.
Getting the Numbers
Typically when considering investment properties you will be sent listings by your agent and sometimes those will have some of the numbers you will need to make a decision. In many cases your agent will need to contact the listing agent to get a more thorough breakdown of the numbers for you. However, there is no guarantee that those numbers will be correct. It’s not uncommon for a seller or their agent to try to present the rosiest picture possible of a property’s numbers, but you need the real numbers to make your decision.
There are ways to tell if the numbers are incorrect or overly optimistic and there are some standard numbers and percentages your agent should use to do the calculations needed to evaluate a property.
There are some standard formulas used to determine things like GRM (Gross Rent Multiplier), NOI (Net Operating Income), CAP rate (Capitalization Rate) and ROE (Return on Equity). These are used to determine when a property is a good investment, at what price it would be a good investment or whether it is or isn’t a good time to sell.
Using the Numbers
If you are a seasoned investor then you most likely already use at least some of these methods and formulas. That’s great if you do but you or your agent still needs to know ways to tell if the numbers you’re looking at are ‘fluffed up’.
If you are not as experienced then you need to have an agent who does use these methods and formulas and will need to learn what they are and how they are used in evaluating a property. You won’t need to necessarily learn how to do all the calculations but you should know when to ask what the CAP rate is, for instance, and how to determine if it indicates you should buy a property or not.