• Client Info
  • Realtor Info
  • Seller Login
  • Contact

Boulder Property Network

Boulder Property Network

Boulder County Real Estate

  • Home
  • Search Real Estate Listings
  • Duane’s Timely Topics
  • Results Count
    • Why We Work by Referral
    • Testimonials
  • Our Team
    • Timmy Duggan
    • Barb Passalacqua
    • Kelsey Jensen
    • Duane Duggan
  • Real Estate Blog
You are here: Home / Boulder Real Estate Blog / Comparing real estate investments

Comparing real estate investments

January 2, 2023 by The Boulder Property Network

Comparing Real Estate Investments

When an attractive investment property comes up, there will often be multiple offers in the first few days on the market. Therefore, as an investor, you need to be able to analyze the investment as quickly as possible to determine if it is right for you.

 

The real estate investment market can move very quickly. When an attractive investment property comes up, there will often be multiple offers in the first few days on the market. Therefore, as an investor, you need to be able to analyze the investment as quickly as possible to determine if it is right for you.

There are several rules of thumb that help you compare different investment properties. The perfect comparison would account for all factors involved in a real estate investment: rent amounts, purchase price, initial investment, appreciation, depreciation, expenses, loan amount, holding period, time value of money, exact future sales price, and tax liability upon sale. None of the following methods are “perfect” comparisons. They all have their advantages and disadvantages.

Gross Rent Multiplier (GRM)

The most commonly used rule of thumb is called the gross rent multiplier. It simply compares the price of the property to the annual gross rent. Part of the reason it is so popular as an investment measure is that on each listing sheet in the local area Multiple Listing Service (MLS) for income property, a GRM is calculated by the MLS system and shown on the listing sheet. In general, the lower the GRM, the better the value and rate of return on the dollar invested. Its drawback is that it only considers rent and price out of all of the factors listed above.

Capitalization Rate (Cap Rate)

This is popular because it is also easy to compute. It is arrived at by dividing the Net Operating Income (NOI) by the price. It is also indicated on the MLS sheet for each property. In theory, it is a better measure than the GRM because it takes into account the Net Operating Income (rent less the expenses of the property). The problem is that the expenses of the property are rarely reflected accurately in the MLS and are often inaccurate even when they come directly from the owner. If the expenses are in error, and the MLS system calculates the cap rate, you have garbage in, garbage out. Therefore, for this rule of thumb to have the most meaning to an individual investor, it is best to try to figure out as closely as possible what the expenses are for each property and add realistic estimates for total expenses for each property analyzed. Its other drawback is that it only considers rent, expenses, and price, out of all the factors listed above.

Cash on Cash

Cash on Cash is one of the easiest factors to compare directly with a more liquid investment. Simply take the annual cash flow after expenses but before taxes and divide it by the initial investment. The result is a percent return, which you can compare to the investment where the cash is sitting prior to investing in real estate. The drawback is that it only considers rent, expenses, and initial investment, out of all the factors listed above.

Debt Coverage Ratio

When applying for a loan on a multi-unit or 5+ unit, most lenders will consider a ratio called the debt coverage ratio. This ratio compares Net Operating Income (NOI) to the principal and interest payment. Lenders will typically want to see a ratio of 1:1.2. Another way to look at it is that the NOI must be 120% of the monthly principal and interest payment. Lenders will be using their own formula for computing NOI. Sometimes the biggest variable will be an estimate for expenses and vacancy allowances.

Internal Rate of Return (IRR)

Probably the best comparison of all used by the most serious investors is the Internal Rate of Return (IRR). In general, the IRR is probably utilized the least because it is the hardest to calculate. This comparison considers many more of the factors listed above, but its accuracy is limited by the accuracy of expense information available, correct mortgage figures, accuracy of prediction of future cash flows (rents and future sales price), accuracy of predicted investor tax bracket at time of sale, etc. Even though the theory behind the IRR is great, it is still just a guess about how the property might perform in the future. The best example of how inaccurate it might be is the appreciation factor. Let’s say in your analysis of past data, the appreciation rate has been 8% a year. Just after purchasing it, the real estate market slows, and the appreciation rate is actually 4% per year over the ownership period. The difference between those two numbers significantly affects the IRR. Using IRR does, however, provide a great opportunity to enter “real numbers” into the formula after the property has been owned for five years, sold, and the taxes paid. Using those “real numbers,” you can truly compare a real estate investment to other investments that competed for the investment dollars five years ago.

There are several products that have been developed to help you do an Internal Rate of Return analysis. If you are interested in that, you can go to landlordsoftware.com and check out the various products available.

When you are purchasing investment property, be sure to consult your REALTOR®, CPA, and other investment advisors to make sure the property is right for you.

By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or
visit BoulderPropertyNetworki.com.

Filed Under: Boulder Real Estate Blog, Duane's Timely Topics, Real Estate Investment Information Tagged With: #bouldercountyrealestate, #boulderrealestate, #caprate, #coloradorealestate, #firsttimehomebuyer, #grossrentmultiplier, #homebuyer, #homeseller, #IRR, #RealEstate, #realestateinvestments

Contact Us

  • This field is for validation purposes and should be left unchanged.

Blog Archives

Featured Listings

$199,700For Sale!1199 Brainard Lake Ward, CO 80481View Listing
Lot 12: $173,000 / Lot 13: $174,700For Sale!0 5th St (Lot 12 & 13)Nederland, CO 80466View Listing

See all of our listings.

Recently Sold Properties

389,700Sold3365 Chisholm Trl B101Boulder, CO 80301View Listing
$2,997,000Sold3080 Galena WayBoulder, CO 80305View Listing
$649,700 Sold271 Jefferson AveLouisville, CO 80027View Listing
$628,700Sold170 Golden Gate Canyon RdBlack Hawk, CO 80422View Listing
$655,000Sold2323 Buttercup CtSuperior, CO 80027View Listing
$595,000Sold1513 Sepia AveLongmont, CO 80501View Listing
$873,000Sold5455 Lee Hill DrBoulder, CO 80302View Listing
$451,000Sold311 Windance RdEstes Park, CO 80517View Listing
$235,000 / 280,000Sold765 Pine St & 797 Pine StNederland, CO 80466View Listing
$770,000Sold705 Club Pl.Louisville, CO 80027View Listing

Tweets by BoulderPropNet

Download our App

Boulder Property Network AppGet the Boulder Property Network mobile app to start your search for a new home right from your phone or other mobile device!

Download it here >>

Neighborhood News Report

How's the market? We can provide you with accurate information on the real estate market activity (Listings , Sales & more) in the area you are most interested in!

Get your Neighborhood News here >

Free Home Valuation

Free Market ReportBoulder Property Network can provide you with the information that you need to make a plan for your real estate purchase or sale.

Get your home valuation >>

Looking to Sell?

Looking to Buy?

Information for Investors

Recommended Reading for REALTORS®

REALTOR® for Life

by Duane Duggan

realtor-for-lifeWhat does it take to be a REALTOR® for life? This book provides first hand knowledge from one of the most distinguished and active careers in real estate. Duane Discusses his newly published book here.

Purchase on Amazon

© 2023 Boulder Property Network • RE/MAX of Boulder Inc.
2425 Canyon Blvd. #110, Boulder, CO 80302
800-825-7000 x611

Boulder Property Network on FacebookBoulder Property Network on TwitterDuane Duggan on LinkedinOur listings on YouTubeDownload our Listings App
Site Map