Learn How To Analyze Property Profitability
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Analyzing Investment Properties
Want to see if a potential investment property is going to increase your overall wealth? When it comes to analyzing a property for profitability, you need to ask yourself a series of 3 questions:
What is the property’s profitability?
Is there a high return on investment?
How Does it's Profitiabilty Compare?
We can answer these questions by looking at different values that help measure investment outcomes.
Capitalization Rate (cap rate)
Capitalization rate measures the risk of an investment. The greater the cap rate is, the greater the risk. This can be calculated by dividing the next operating income by the market value of the property.
A low risk property has a capitalization rate of between 7%-10%.
Return on Investment (ROI)
Often referred to as ROI, a return on investment measures the amount of profit an investor can make off a property. The greater the ROI, the better the investment. ROI is calculated by subtracting the invested amount from the returned amount and divided by the invested amount.
A profitable property has a ROI of between 10%-12%.
Gross Rental Multiplier (GRM)
The gross rental multiplier measures the property income value. The lower the GRM, the lower the investment risk. GRM can be calculated by dividing the property price by the gross rental income.
A high income value property has a GRM of between 4%-7%.
Note: Although all of these values are useful for analyzing the profitability of a potential investment property, the capitalization rate (cap rate) is the most common indicator of determining if the property you are considering is a good investment.
Capitalization Rate (cap rate)
Capitalization rate measures the risk of an investment. The greater the cap rate is, the greater the risk. This can be calculated by dividing the next operating income by the market value of the property.
A low risk property has a capitalization rate of between 7%-10%.
Return on Investment (ROI)
Often referred to as ROI, a return on investment measures the amount of profit an investor can make off a property. The greater the ROI, the better the investment. ROI is calculated by subtracting the invested amount from the returned amount and divided by the invested amount.
A profitable property has a ROI of between 10%-12%.
Gross Rental Multiplier (GRM)
The gross rental multiplier measures the property income value. The lower the GRM, the lower the investment risk. GRM can be calculated by dividing the property price by the gross rental income.
A high income value property has a GRM of between 4%-7%.
Note: Although all of these values are useful for analyzing the profitability of a potential investment property, the capitalization rate (cap rate) is the most common indicator of determining if the property you are considering is a good investment.
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