The Real Estate Mathematics

Many of you are likely to use the gross income multiplier (GIM) when the time comes to evaluate the selling price of an income property. This is usually the first analysis someone does in order to see if it is worthwhile to consider a specific property. When the answer is positive we usually follow with the net income multiplier (NIM). This step is a little more complicated due to information that is often incomplete. However, if you are able to get accurate data and the results are good, then it is time to go for the big analysis: DCR, IRR, CapRate, ConC, BER. These are all different ratios that give a good idea of what lies ahead financially speaking during the first year of operation of a new acquisition. To be really sure of hitting the mark, it is wise to make projections on the next five years to determine if the project is really worth the effort. If this is positive, we are quite possibly looking at a very interesting deal!

The final details to be considered and studied are the technical aspects of the building and the quality of the clientele. These two elements will have an impact on the financial perspectives in the medium and long term as well as the time and energy that the new owner will devote to the management of the building. It will be important not to neglect them.

All this takes time, but when you know that income property can generate an annual return of around 25 to 40% on the amount invested, then the effort is absolutely worth the trouble.

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