Rental Income vs. Property Value

by Mr. Cheap

I’ve posted on the topic before, but I’ve been looking at Toronto area multiplexes and have bumped up against the issue of asking price vs. market rent again.

ICX (like mls but for commercial properties) has some nice little properties listed (this link will expire in the near future, don’t feel bad if its dead). The property linked to is a nice 3-plex in North York which brings in $2,075 / Month ($24,900 / year) and the owner is asking $299,500.

A good “back of the envelope” calculation for real estate investors is the GRM (gross rent multiplier). This is basically the price / rent (so a lower ratio is better than a higher ratio). Its a good way to ballpark if a property is worth looking at more closely or not. Some sources claim you should use the monthly rent, some claim you should use the annual rent (it doesn’t matter which you use, as long as you’re consistent).

Capitalization Rate is far more illuminating (its based on the net profit instead of the gross income), but takes a bit more digging to calculate.

My condo, with a monthly rent of $1300 and a purchase price of around $134K (accepted price + renos – not including legal or anything else) would have a GRM of 103 (134000 / 1300). In comparison, this building has a GRM of 144. Given that multiplexes should be MORE lucrative than condos (not far less), this especially pitiful.

High GRMs also are good at telling us when housing prices are getting far above rental rates (which is a good indication of an overly frothy real estate market).

If we turn our eye north, and have a look at this gem in Thunder Bay (its a 6-plex but we can ignore that for the time being), we see that in the true great white north a rent of $4,100 / month (49,200 / year) can be had for $249,000 (twice the income for a lower price). This gives us a GRM of 61, which is far more like it!

But Mr. Cheap…” you protest, “Toronto is a big city, OF COURSE property costs more here!” Yes. But shouldn’t rents be higher too? GRM lets us see the relationship between the stream of income from a piece of real estate and the purchase price of that stream. Even if its harder to find tenants or to sell the building in the future, the higher income for lower purchase price certainly makes property outside the GTA look attractive (not even mentioning the upcoming increased transfer tax).

Any other towns in Ontario that you guys think give a better GRM than Toronto (or perhaps to belabor the point, any with worse numbers)? What do the numbers look like in Windsor Telly?

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