Real Estate Investment in Shasta County
Real Estate investments in Shasta County California are some of the most attractive investments the state has to offer. The return on investment and positive cash flow opportunities available in our area are much more attractive than many other locations throughout the state of California. This page will offer some insights into what to look for when identifying real estate investment opportunities as well as direct access to the majority of properties currently available.
Lets start by discussing how to determine the value of a real estate investment property...
Capitalization rate, more commonly referred to as "Cap Rate" and the Gross Rent Multiplier, more commonly referred to as "GRM" are both tools used for analyzing an income property and determining its value and/or profitability.
You may be asking...How can Cap Rate and GRM formulas be used for evaluating an income property? How are they calculated? And what are the advantages and disadvantages of each? Not to worry...We will give you a crash course on these formulas and how to apply them to real estate investing.
Both the Cap Rate and the GRM are formulas used to evaluate real estate investments and assist in determining value based on the amount of rental income that it can generate. The Cap Rate and the GRM are both used for real estate analysis by real estate investors, and they are both considered the basic tools for evaluating real estate investments.
Cap Rate
The capitalization rate value is a percentage value that measures the relationship between the NOI (net operating income) of an income property and its current market value.
The Cap Rate can be used to evaluate an income property and determine the percentage rate of its NOI to its value. The Cap Rate method is the most commonly used method for determining a value for Investors, Real Estate Professionals, Appraisers, and Banks.
Utilizing the capitalization rate value is a great method for evaluating an income property as it takes into account the property’s operational expenses as well as its current vacancy rate. In addition, the Cap Rate value can reveal whether the income property has the ability to pay off a mortgage or not.
Cap Rate Calculation
The Cap Rate is calculated using this simple formula:
Cap Rate = Annual NOI / Market Value
In order to determine the Cap Rate for an income property, you must do the research and obtain all the necessary information about the subject property, market conditions and Cap Rates for comparable investments. Determining the subject properties and comparable property expenses can be the most challenging part of determining an accurate Cap Rate.
This same method used in reverse can also identify the market value for an investment property.
Market Value = Annual NOI / Cap Rate
Gross Rent Multiplier (GRM)
The GRM measures the ratio between the property’s gross scheduled income (GSI) and its price. It is the faster and hastier method used by real estate investors in order to determine the amount of income that it will generate quickly.
GRM Calculation
This is the formula used for calculating the GRM:
GRM = Market Value / Gross Scheduled Income (GSI)
As with the Cap Rate, In order to determine the GRM for an income property, you must do the research and obtain all the necessary information about the subject property, market conditions and GRM for comparable investments.
This same method used in reverse can also identify the market value for an investment property.
Value = GSI x GRM
A major disadvantage of using the GRM for investment property valuations is that it is based on the GSI. Meaning that it does not take into account the income property’s vacancy rate or its annual operating expenses.
Additional Thoughts
The Cap rate formula is considered to be more reliable due to the attention put on operating expenses and vacancy factors.
The Gross Rent Multiplier formula is the fastest way to estimate value. However, it does not account for operating expenses or vacancy rates.
Acceptable Cap rates vary by region as well as the age of the subject property. Generally speaking, the higher the percentage the better the investment. Big city investors are typically satisfied with 4%-5% returns, while markets like Shasta County want to see investments at 6% or higher.
Acceptable Gross Rent Multipliers vary by region as well as the age of the subject property. Generally speaking, the lower the GRM number is, the better the investment. Big city investors are typically satisfied with a number of 15 or even higher, while Shasta County investors typically would not find that investment attractive.
Cash on Cash Returns are another way to calculate investments. This calculation is typically used when using leverage to purchase an investment property. Due to the complexity of this analysis, we will keep it simple and say this. Cash on Cash returns determine the percentage of return on the actual amount of cash out of pocket invested.
Upside Opportunity is a term frequently used by real estate investors and Real Estate Professionals. Generally speaking, this term relates to the upside potential of a real estate investment that does not currently exist. An example of an upside opportunity is a property that is undervalued due to pricing, poor management or poor condition which has the potential to be corrected. This term can also relate to properties that are rented below market rates and have the ability to receive rent increases in a projected period of time.
If you have any additional questions regarding real estate investing, please feel free to contact our office at (530) 222-3800. We are always here to help.
