Archive for Amount Of Money
Safe High Return Investments Chicago: Tempting Fate With Futures
Posted by: | CommentsSafe High Return Investments Chicago
Getting the better of the markets is never a straightforward proposition. Investments can be a problematic prospect, especially for the average investor whose only aim in to grow his or her nest egg. Indeed, in some regards these investors are the backbone of the industry. That being said, they can also be some of its most dramatic victims. One mismanaged trade can be the ruin of any fortune — and often is.
This is why many go-it-alone investors prefer to add a new dimension to their investment strategy: time. To the uninitiated, this means they prefer to trade in futures. This means investors can utilize traditional commodities or E-mini index funds to leverage the projected value of commodities at some point in the future — hence the name.
Futures are not shackled to the whims and wishes of Wall Street — not directly, in any case. To that end, an investor can enjoy the privilege of round-the-clock trading via any global exchange. To be sure, the futures trader does not look to New York as much as he or she looks to the Second City, Chicago. The Chicago Mercantile Exchange is the mecca future traders turn to seek their fortunes.
The only conceivable downside, short of not having a clue, is cash in hand. While futures allow for greater investment flexibility, they require ready access to significant amounts of liquid capital. That is, they require access to cash — and lots of it. This is so because should your E-minis drop below the CME margin call, you will be required to ante-up, as it were. You can’t take your place at the roulette wheel unless you can afford to buy the placards, you see.
With a handful of E-minis, some commodities traders can reap a veritable financial whirlwind. What futures promise — and often deliver to the savvy strategist — is the potential for dramatic gains. Of course, this is subject to training and it would be in the best interests of the would-be futures traders to enroll in a futures trading course before embarking on too rigorous a trading regiment.
Heed the better part of your common sense and enroll in a reputable futures trading course prior to frittering away your hard-earned capital.
Does Cap Rate or Gross Rent Multiplier Best Evaluate Property Value?
Posted by: | CommentsBy jamesrk
Cap rate and gross rent multiplier are each a method of measurement commonly used by real estate investors and agents to evaluate the price of investment real estate in order to determine whether it is, or is not, priced correctly and therefore offers a good investment opportunity.
For example. Whereas some agents and investors, having researched what other similar properties have sold for, use the cap rate method to determine and set a price for rental properties, others rely on the gross rent multiplier (or GRM) method.
So which is better? At the end of the day, which method used to estimate a property’s value is the better measurement of a property’s financial performance and more likely to lead to a smart investment decision?
Let’s consider both, and then decide.
Capitalization Rate
This rate provides a relationship measurement between a rental property’s net operating income (or NOI) and sale price. Expressed as a percentage, cap rate reveals what percent of the price is attributable to net operating income, and as a rule of thumb, whether a property generates enough income to pay its own way.
Here’s the idea. Because net operating income represents all income less operating expenses, NOI indicates the amount of money produced by the property available to pay the mortgage. This is the reason why lenders look closely at the property’s net operating income when making a loan.
The formula is straightforward: To arrive at its value, you simply multiply a property’s NOI by whatever cap rate you feel best reflects the rate in your market area. For example, if similar properties are selling at a 6.0% cap rate, then multiply the subject property’s net operating income by 6.0 to determine its market value.
The disadvantage of this method (if you can call it a disadvantage) is that it’s sometimes difficult to confirm a sold property’s actual operating expenses and therefore to determine the actual (not merely the published) capitalization rate it sold for. A good work-around is to get the market rate from a local appraiser.
As a rule of thumb, because it depends on individual market areas, there is no such thing as a universal capitalization rate. What might make a rental income property a steal in one city or state at 6%, might not get a second look in another.
Gross Rent Multiplier
The GRM method (expressed as a number) measures the ratio between a rental property’s gross scheduled income (GSI) and its price.
The advantage of this method is that you can compute GRM in your head. You just divide the property’s selling price by its gross scheduled income.
For example, if a property with $200,000 gross scheduled income sells for $1,000,000, it would have sold at a gross rent multiplier of 5.0 ($1,000,000 / 200,000).
Conversely, to arrive at a property’s value using this method, you simply multiply its GSI by whatever GRM you determine is appropriate for your market area (say it is 5.0): $200,000 x 5.0 = $1,000,000.
Nonetheless, though it is easy to compute, the disadvantage of using this method is that gross scheduled income does not account for occupancy levels and operating expenses (both of which are important indicators of a rental property’s overall performance).
There is no universally correct number because it, too, is market driven. However, as a rule of thumb, you might want to become suspicious if you see a GRM lower than 4 or higher than 12.
Okay, so which method is the best way to arrive at investment real estate value?
Gross rent multiplier is certainly the easier method to calculate, and does serve as a useful precursor to a serious property analysis, but analysts would agree that the more reliable way to determine rental property value is with the cap rate method. Fair enough.
But never rely on capitalization rate alone to provide a true picture of a property’s profitability or to make a real estate investment decision. Always correctly compute all the numbers, rates of return, and cash flow scenarios for yourself.
Remember that numbers can be manipulated. When you are being told how great a buy an income property is based upon its cap rate, always reconstruct your own raw data to insure that all is revealed and nothing is concealed before you actively pursue the real estate investment further.
James Kobzeff is the developer of ProAPOD – leading real estate agent software solutions since 2000. Create rental property cash flow analysis and marketing presentations in minutes! Go to => www.proapod.com