|
Real Estate Ratio Ranges for Apartment Buildings
The following information provides typical
ranges for key real estate investment ratios.
Included are a cap rate range of values, gross rent multiplier range
of values, internal rate of return range of values, cash on cash
return range of values and operating expense ratio range of values.
The ratios assume a typical down
payment (20%).
You may find bargains that fall
outside of these ranges.
All market places are different.
These values can vary from one area of
the country to another and from one area of a city to another.
This information should help you to
better understand these investment tools.
If you own a real estate investment program,
you should run the financial data for as many income properties as
you can to get a feel for your market place.
Be sure that you are getting detailed
and accurate financial data.
The adage, garbage in, garbage out,
applies to real estate investment analysis software.
If you are considering purchasing an
income property, verify the financial data you were given with the
seller’s tax returns.
We are in a strong buyer’s market.
You should expect to get a better deal
than you would have a few years ago.
Commercial loans are more difficult to
get and LTV requirements are higher.
For some types of commercial income
properties, it is difficult to impossible to get a loan, even if you
have a large down payment.
Note - These range values are an
estimate based on running financial data for customers. They
also take into consideration what others view as reasonable ranges.
Any input would be greatly appreciated. Be sure to read the articles on these ratios in the Advanced Topics
section of the invest-2win.com website. The purpose of this
article is to give the novice real estate investor a better feel for
these key real estate ratios.
Cap Rate Range -
7 to 12
■
Cap
rates vary from market place to market place
■
The
higher the better – higher indicates greater return
■
Newer
income properties typically have lower cap rates than older income
properties
■
A higher
cap rate may indicate more risk. Factors that may increase
risk include
location,
property upkeep, high crime levels, age of property, high vacancy
rates, etc.
■
Check
with a commercial appraiser who appraises income property in the area that you are
buying to see if you can get a recent market cap rate for the type
of property you are looking at. Read the article on the
Income Approach on the website.
■
Cap
rates should be higher in general than they were several years ago
because of the current real estate market and the difficulty of
obtaining a loan
Gross Rent Multiplier Range - 5 to 12
■
The
Lower the better – Lower indicates greater return
■
The GRM
provides a rough estimate of value
■
Doesn’t
require much financial detail to size up a property
■
Newer
income properties have a higher GRM in general than older
income properties
■
GRM
calculation only looks at the properties income and price, it
doesn’t look at
operating
expense, vacancies, etc.
■ Be sure
to determine vacancy rate.
You may want to use the effective
GRM.
Cash on Cash Return Range - 5 to 15 for first year of operation
■
Higher
the better
■
Commercial mortgage rates have a large impact on cash on cash return
■
How much
you put down has a large impact on cash on cash return.
■
If the
property cash flows with a typical down payment (20%), putting down
more
will lower the cash on cash return and the Internal Rate of Return.
Debt Coverage Ratio - 1.2 to 1.25 – likely higher in this market
■
In
determining whether or not to give a loan, lenders look at the DCR,
your down payment amount, your income
property management experience, your income from all sources, etc.
■
Lenders
usually include the cost of a property management firm in the DCR
calculation
since they will need to procure one if you default
■
For
small income properties, 1 to 4 units, it improves your chances of
getting a loan if the property will
be owner
occupied
■
The
larger the down payment, the better your coverage ratios will look
to the bank.
■ The higher the DCR the better from a lenders
perspective
Internal Rate of Return Range / Modified IRR Range – 15 to 25
■
First year IRR is unimportant since you won’t buy it and immediately resell it.
Look at the results 5
to 10 years out.
■
IRR / MIRR is based on your assumptions for income growth rate, expense
growth rate and
appreciation growth rate – (Be conservative)
■
IRR calculation is subjective – The calculation incorporates your
income tax rate and capital gains rate.
The higher your tax rates the lower your IRR.
■
Down payment amount will have a large impact on IRR / MIRR
Operating Expense Ratio Range - 25 to 50
■
Lower the better
■
High Vacancy rates result in higher effective OER’s
■
Large income properties with professional management typically have
higher OER’s
because of the cost of property management
■
Owner managed income properties have lower OER’s because they don’t
pay for a
property management firm.
■
If the property owner pays the heat and electricity, this can affect the
OER
■
Poor property management can affect the OER. (Usually more vacancies
and sub market
rents)
Rents not at market value translate into a higher OER.
■
Property taxes can vary from state to state.
States with high property tax rates translates into a higher
OER.
What factors can affect these ratios?
■
Mortgage
rate levels
■
Down
Payment Requirements
■
Vacancy
Rates
■
Availability of Jobs
■
Over
Supply of Apartment Buildings
■
Current
and Future economic outlook
■
Demand for Real Estate
■
Physical
condition of a neighborhood
■ Physical condition of the property
■
Location
of property
■
Age of
property
■
Local
infrastructure
■
Level of
crime in the area
■
Proximity to shopping, schools, churches, entertainment, etc.
■
Capital
gains rates, income tax rates, depreciation tax laws, property
tax rates
■
Poor
property management and upkeep
■
Etc.
©
Copyright 2000 - 2012 Advantage Software LLC |
