Calculate the Return on Your Real Estate Investment Property

The first step when analyzing any property you are considering purchasing is to write down all the numbers. Calculate the gross annual income of the property, as well as the cost of the potential mortgage and taxes. These are the basic numbers which you will need in order to make a basic analysis of the potential economic return on the property.

Calculating Yield
Gross Annual Income/Sale Price

Yield is the most basic analyzing tool for any real estate investment. It is also the least useful in informing you of the economic value of the property. However it is a quick and easy way to give you a basic idea of where the property is going.

To calculate the yield, simply total up the income you will receive from the property in a given year, then divide this by the sale price. You will receive the yield in a form of a percentage.

For example, let’s say that you are looking at a duplex that costs $100,000. One half of the duplex earns $500 a month, the other $600 for a total of $1100 a month. That gives us $12,100 a year. $12,100 divided by $100,000 gives us a yield of 12.1%. This is not the greatest yield ever, but it is not necessarily bad either However, this basic analysis does not take all of the many factors which must be taken into account: the price of your mortgage, property taxes, other expenses, depreciation values of the house or equity in the long term.

Gross-Rent-Multiplier (GRM)
Sale Pirce/Gross Annual Rent

The Gross Rent Multiplier is almost exactly the same as calculating the yield. The numbers are the same, but now we are looking at those numbers in reverse. Using the GRM we can find how many years it will take the property to earn the sale price of the property. The lower the number, the better.

Using our example from above, we know that we are earning $12,100 on our $100,000 duplex. When we do the math we learn that it will take about 8 years and three months for our property to earn us the sale price. 8.25 is well within the normal range for a GRM. With older housing that might not be selling for full value we can sometimes see a GRM as low as 5, for newer housing it can often be as high as 12.