Starting out in Rhode island

[Sherwin Vargas]

Hey guys,

I have been studying and learning for the past year but I am finally ready to buy It seems like alot of the multi family listings are at great prices in rhode island and am getting slightly overwhelmed with where to start. 

I been sort of following a quick rule of thumb for a 20% cap rate. just as an idea. I was wondering what other Rhode island investors use as rule of thumbs to quickly fish out bad and better investments. 

 I have been looking in pawtucket, and providence mostly. I know There are alot of quick test and rules of thumb but I am just wondering what exacly rhode island investors use. 

Thanks in advance. 

[Anthony Thompson]

Sherwin, if you have 3 units at 700 each, assuming 50% of gross income goes to expenses, that means a net operating income (NOI) of 12,600. Dividing that by a purchase price of 150,000 would be a cap rate of 8.4%.

You can argue finer points of the calculation (I didn't subtract 5% or 10% for vacancy for example, and 50% isn't good if landlord is paying utilities, doesn't account for differences in property tax rates in various cities/towns, etc.).

But I think the thing is that you're dividing gross income by purchase price when you should be dividing NET income (NOI) to get the cap rate.

(Incidentally, dividing purchase price by gross rent - the inverse of what you were doing - is known as Gross Rent Multiplier or GRM and is very similar to looking at per-unit cost - an extremely rough way of comparing properties.)