Resource Guide and News
Buying Income Property
Income or cashflow property refers to property that provide a high rental income stream. For example, a property in New York City may cost 15 times its annual rent potential. A property in Syracuse may cost 8 times its annual rent potential. Hence, Syracuse is said to provide better income properties relative to New York City. This metric of multiples of annual rent is called the GRM (Gross Rent Multiple).
Another metric is to use the cap rate, or capitalization rate. This is effectively the operating income margin of a property. A property that has a cap rate of 10% means that after collecting all rents and paying all expenses, 10% of the property price is left to pay for the mortgage. Or if the owner does not have a mortgage, it means the owner keeps 10% of the property price per year. Higher cap rates mean higher income. And of course, cap rates differ depending on city. A city may have a low cap rate but higher appreciation potential. Conversely, a high cap rate city may have lower appreciation potential.
It is very important for buyers, especially amateur investors, to understand the difference between realizable cap rate and forecast cap rate. Too often, unethical brokers lure investors with very high promised cap rates. However, realizing and successfully collecting on the forecast rents (that these high cap rates are based on) can be a totally different thing. The investor needs to do his due diligence and have a strong team that will objectively advice on a property's potential. And never rely on a broker's promise on a cap rate, especially when the cap rate is too good to be true.
Income properties' value increase as the rent roll increases. This is done through improving the building quality which leads to higher rents. Based on a city's cap rate, higher rents will result in higher building value. On the expenses side, the investor needs to control expenses diligently. Examples include ensuring no utility wastage, applying for tax benefits if any, minimizing legal costs, making sure marketing expenses are productive etc etc.
The combination of increasing rents and controlling expenses will ensure your property's productivity and ultimately, increase your building value.