Estate House QTA

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.

An idea that doesn’t always immediately spring to mind when selling your property is that instead of selling it for a lump-sum monetary settlement, why not sell it to your buyer by an agreed instalment plan? This instalment plan can be organised over a mutually agreed timeframe so that you have cash flow coming in each month and your buyer can pay within their budget.

The beauty of this is that if your buyer does fail to make their payments, the house remains in your name so you do not lose your asset.

By selling your house in this way, it is you rather than a bank or other financial lending institution that is providing the buyer the means to buy – they will not need to go anywhere for mortgage as it is theoretically you that has become the financier. The majority of the profit that you gain from doing this (it is called house wrapping), is interest and most of the risks of owning the property are passed on to the buyer.

Positive Net Cashflow

When your buyer is paying you more each month than you need to pay on your own loan repayments, you are seen to be in positive net cashflow – this is an ideal situation to be in as you don’t really need to think about how the mortgage on the property is made each month. It is a great idea to receive your instalment payments from the purchaser via direct debit.

Why Wrap?

There are many people who are desperate to own their own properties but for whatever reason can’t get a mortgage. This is often because they are self-employed. Banks don’t like to take the risk in offering a mortgage to self-employed as they do not consider that it is a safe enough bet that the buyer’s business will survive the term of the mortgage. However, often business owners are the most responsible when it comes to money, after all it’s their own livelihoods that are on the line if their business fails and what the banks also do not appear to consider that in today’s climate, no paid employment is bullet proof safe either.

There have been many concerns about the ethics involved in house property wrapping and this has mainly come about because of the minority of people who clearly are out to gain purely for themselves and not consider the welfare of the property buyer. There are always risks involved and that’s why it is of the utmost importance to go to an expert in property wrapping such as myself to ensure that you are getting the best deal.

When a house wrap is done with a win-win situation in mind, rarely are problems created. This technique can offer not only an excellent return for the financier (current house owner), it also provides a fantastic opportunity for the new buyer to finally own their own property when they have probably been turned down so many times before by other lending institutions.

It has to be said though that you should not rush in and try and make these deals yourself until you have had some expert guidance – each situation is different and you need to create the house wrap that caters for both you and the other party involved.

For this reason, I have come up with a unique house property wrapping guide and full one-on-one coaching program that will take you through all the steps needed to ensure that your first property wrap is a successful one. Ultimately this will save you thousands of dollars in the long run.