Sino Investment

1. Gross Rental Multiplier

Gross Rental Multiplier (GRM) is one of the commonly used methods of assessing if a property is worth pursuing when buying completed properties from the secondary market. Although one can estimate the values, it requires one to have access to current and detailed financial information about the selected property.

The Gross Rental Multiplier is calculated by dividing the sale price of the property by the annual gross income, i.e. the gross rental receivable. The result of this calculation will give you a result that will assist in determining if the property is indeed worth purchasing.
An example:

Price of Property: $1 Million
Annual Gross Rental ($5,000 per month x 12 months) = $60,000

Gross Rental Multiplier = Annual Gross Rental divided by Sale Price = $60,000
divided by $1 Million = 0.06 x 100 = 6%

Thus, the answer is 6 percent per annum. When compared with the current fixed deposit rate anything from 1.5 to 2 times indicates a good buy.

2. Cash Flow

Regardless of its location or design, a property has to generate a cash flow, as investment decisions are largely based on cash flows.

Rental returns of properties around the area are an important issue. Good occupancy rates (above 90 percent) escalating or declining rental in the area, and more demand than supply, are some of the considerations that determine if rental returns are attractive.

Cash flow is calculated by adding monthly cost of quit rent, assessment, taxes, insurance, repairs, maintenance, to the calculated mortgage payment. To get the monthly cost, divide the yearly amount by twelve.

Apart from looking at the Gross Rental Multiplier and Cash Flow, property out-goings affects the overall yield and it is important to understand what they are.

i) Quit Rent
The State Government collects an annual land tax from owners, payable to the state land or district office. This tax is paid by land owners in most countries and may have a different name in each country.

ii) Assessment
The Local Authority or Council provides public facilities and services such as roads, street lights, drains, markets and other utilities, which have a form of tax attached to them.

iii) Agent Fees for Securing a Tenant
Where monthly rent is above five figures for commercial properties, agent fees may be negotiated.

iv) Vacancies
A vacancy occurs when the property is unoccupied resulting in a loss of rental income. For practical calculation purposes, include one month’s vacancy per year when calculating your overall yield.

v) Service Charge
Retail outlets and office suits, and of late, new commercial shop offices charge a monthly fee for allocated parking spaces and/or security patrols.

vi) Maintenance and Repairs

Landlords of most commercial properties are required to maintain and repair the structure of the building, and attend to leakages from the roof or piping.

vii) Capital Appreciation

When considering property in a particular area, inquire into the capital appreciation record of properties similar to what you are looking at. 10 percent capital appreciation in one year, or 30 percent within three to five years is adequate. Property market trends in most countries follow a natural five to seven-year cycle in which the property prices double. Future market trends are expected to be shorter and sharper, thus carefully selected property will appreciate over time for basic reasons as it will cost more to build the same building due to rising construction material and labor cost, and inflation.