Who's got metrics for me? GRMs, CAPRates, YOY Growth, Median Income vs median rent

[Craig Sparling]

I consider myself an old school fundamentals guys.  I've read about Benjamin Graham and Warren Buffets approach to investing at large and it resonates with me more so than the crypto-generation.  Real estate's "gross rent multiplier" is Wall Street's "sales to revenue",  "cap rate" is roughly "P/E ratio".

When evaluating markets and investments I tend to start with GRM (or lazily the 1% rule), then attempt to return a cap rate based on assumptions about costs, then I work my way to multiple years of projections (assumptions about inflation, amortization, tax benefits, etc), and if I am partnering with one of my smart friends I have to pull up an IRR (internal rate of return).

I also look at regional employment levels, median income to rent ratio in the zip code etc.  And here in Chicago I always check my favorite local homicide tracker whose name violates usage restrictions.

Is there other favorite metrics out there that I am missing?  Is anyone else willing to share the math-side property screening process? Is there other market wide metrics that apply here?

[Dennis Bragg]

Hey @Craig Sparling

Love seeing someone approach real estate like Benjamin Graham or Warren Buffett might tackle stocks... methodical, data-driven, and grounded in fundamentals. Your mention of using GRM as a first pass and then diving deeper into cap rates and IRR is exactly how I've seen some of the sharpest investors I know operate.

I had a buddy in Chicago who bought a four-unit last year in Pilsen. We spent weeks analyzing the details. GRM and cap rate both looked great, but when we pulled utility records, we found heating costs in winter were brutal because of old, inefficient systems. That added a 12% expense bump- totally changed the vacancy dynamics. Little details like that are why I obsess over digging deeper than just the metrics.

Metrics I find useful:

Expense Ratio: Look at operating expenses as a percentage of gross income. If it's way out of whack with the market average, dig deeper.

Debt Service Coverage Ratio: Key for nderstanding if the property's cash flow will cover financing comfortably.

Historical Vacancy Trends: Especially in areas like Chicago, where local job markets fluctuate, knowing vacancy trends can help you anticipate rough patches.

Rent Growth vs. Property Appreciation: For long-term holds, I always compare rent growth with broader market appreciation. For example, I once walked away from a deal in Austin becaus rents lagged behind the crazy property appreciation there.

You mentioned employment levels and income-to-rent ratios... great calls. One other market-wide factor I’d throw in is local government policies. For instance, cities like Chicago are known for landlord-tenant laws that skew heavily in favor of tenants, and that risk should be baked into your underwriting.

What’s your take on balancing short-term cash flow with long-term equity growth? Always curious how others weigh that trade-off.