The importance of paying the right price for an investment property
One of the most important aspects of property
investing is paying the ‘right’ price for a property in the first place.
If you pay over the odds for a property, it’s not going to make a good investment.
The price you pay for a property will relate to:
The type of property it is;
The size of the property; and
The location of the property;
These factors will also determine how much you can expect to receive in rent from the property.
If you’re not sure about how much rent a potential property investment could bring in, ask a rental agent for some advice.
How to work out if a property is a good deal or not
One way you can check whether the asking price of a property is worth paying or not is to work out the GRM (gross rent multiplier), Mark Ford in The Palm Beach Daily
A good guideline to follow is never to invest in a property that has a GRM above 8.
The GRM ratio tells you how much you should pay for a property taking into account the amount of income you can expect each year in rent.
The GRM formula is:
GRM = Selling price/gross annual rents
It works like this…
Let’s say you’re really interested in a property that looks likely to achieve R8,000 in rent a month. That’s R96,000 a year (R8,000 x 12). Using the GRM ratio, this means you shouldn’t pay more than R768,000 (8 x R96,000) for the property.
If you can’t buy the property for less than this amount, you shouldn’t invest.
So there you have it. How to work out whether a property is worth investing in.
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