Real Estate Matters | Basic real estate measurements
Juliet Risdon
When are analysing investment opportunities, it is important to know the relevant terminology and the acceptable benchmarks to make good decisions. Below are some basic financial measures and benchmarks that you could consider.
Gross Rent Multiplier
The Gross Rent Multiplier is a simple method by which you can estimate the market value of an income property. In basic terms, the Gross Rent Multiplier (GRM) is the number of years the property would take to pay for itself in gross received rent. As you can imagine, the GRM in Macau tends to be a lot higher than in most other parts of the world. GRMs can be used to compare investment opportunities, but generally should not be the only criteria.
Rule of 72s
The Rule of 72s is a great method to calculate the approximate number of years for an investment to double in value at a particular rate of compound interest.
Simply take the rate of growth and divide it as a whole number into 72. Keep in mind that the answer is not precise; you would need to divide into 72.73 to nail the exact amount.
Number of Years to Double in Value (Approx) = 72 / Rate of Growth
Loan-to-Value Ratio
The Loan-to-Value Ratio (LTV) is simply a term used to express the ratio of a loan to the value of an asset purchased. For example, if you borrow HKD 10,000,000 to buy a HKD 15,000,000 property, the LTV would be 10,000,000/15,000,000 = 66%. Of course, the remaining 34% is covered by the borrower’s equity to add up to 100% of the property value.
Cash-on-Cash Return
Usually a quick calculation done on the back of a napkin more than anything, the cash- on-cash return is the ratio between the property’s cash flow in a particular year and the amount of the initial capital investment, expressed as a percentage.
Debt Coverage Ratio
The Debt Coverage Ratio (DCR) is the ratio between the property’s net operating income (NOI, covered in a previous article) for the year and the annual debt service. If these two are exactly the same, the ratio is 1.00, which means that you have exactly enough net income from the property to make your mortgage payments. If it is less than 1.00, it means your property does not generate enough income to pay the mortgage, and vice versa if it is higher than 1.00.
Debt Coverage Ratio = Annual Net Operating Income / Annual Debt Service
Of course, there are many more things that you should consider when making an investment decision, but I hope this gets you started and helps you on your journey as a property investor.
Juliet Risdon is a Director of JML Property and a property investor.
Having been established in 1994, JML Property offers investment property & homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.
info@JMLProperty.com
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