Calculating Numbers on a Rental Property - (Value Triangle Method!)

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Real Estate is easy to understand when you have the basic fundamentals down. When you have the fundamentals down you can then build off of them and become a real pro.

The Value Triangle Method is my method for quickly appraising property values without having to depend on outside sources such as property forecasts, home / property sellers, comparable property sales, and realtors because lets face it, their motivation is to sell you a property at the highest price possible and forecasts are usually off.

So how this formula works on multi family property is simple:

At the top of the triangle is Gross Scheduled Income (GSI) this accounts for all of the monthly gross revenue such as rent, parking (if you charge), laundry (if you charge) and even billboard space if you happen to live in the right area and right location for you however these buildings that support billboards are usually 10-20 units and up (at least in LA anyway). You then take all of the monthly income and multiple it by twelve to give you to total annual gross income.

Then you head down to the right of the triangle and we ask ourself what is our NET income (NOI - net operating income) this is essentially all of our gross income minus our expenses. Our expenses are things like water bills (if we pay them) property taxes, repairs, vacancies, evictions, etc. For easy math on a 3-4 unit property in decent shape this may be 25-35% of gross rents and on a larger building, lets say a 20 unit thats built in 1920 the expenses could be 50% as everything is old and there will be consistent repairs and turn over.

Then we head to the bottom left side of the triangle and discover our cap rate. The cap rate is the NOI (that I just mentioned) divided by the purchase price. In an area such as Manhattan or Beverly Hills your return may be only 3% since there is a huge demand for those areas due to high paying retailers, high paying jobs, usually heavy tourism and investment both domestic and foreign which keeps prices relatively stable and are subject to less volatility in recessions. With that being said, if you go to an area with lower paying jobs, heavy crime activity or let's face it, little demand for the land, you will receive a higher cap rate to encourage you to invest there. In return you will likely deal with more problems in this area from finding a tenant, to increased evictions, to vandalism / crime and more.

The key is finding the right area to invest and in a future video I will teach you just that.