Another Formula for Maximum Allowable Offer on Rental

[Steve K.]

Rich Dad had a free webinar on real estate investing. The speaker's name was Jason. In the webinar, he talked about a mathematical formula to calculate MAO from gross rental income. Like this.

(Yearly Gross Rental Income) x 7 x building condition adjustment factor = MAO

Yearly gross income can be derived from monthly income by multiplying with 12 months in a year.

The building condition adjustment factor is based on three building conditions: great, good, and poor. Great means plus 10%. Good means no adjustment. Poor means minus 10% on the offer.

The only puzzle I don't really understand is what the "7" multiplier is about. Looking at real estate markets around Seattle, where there is bidding war going on, this MAO formula doesn't work. The "7" multiplier is closer to "14". The "14" multiplier probably holds true with other hot real estate markets like San Francisco or silicon valley.

Have you seen this formula? What MAO formula have you used that works for you in a buy and hold rental properties?

[Brett Russell]

Steve Kuan , the GRM is just another way to look at the relationship of rent to purchase price. The "2% Rule" discussed in the Ultimate Beginner's Guide equates to a GRM of 4.17 if you do the math.

Saying it doesn't work in your area isn't entirely accurate: the rule would say you shouldn't be buying most properties in your market for rental income. Whether one sticks to the rule is entirely up to them.