Anyone who has been investing in real estate income property long enough (let’s say for the past two days) has heard about capitalization rate (cap rate) and gross rent multiplier (GRM).

It would be difficult, in fact, not to look at an Annual Property Operating Data (APOD) or Proforma Cash Flow Statement that didn’t include a computation for cap rate or GRM.

Why, because both cap rate and GRM are popular ways to measure the performance of an investment property during the real estate investing process.

Though neither cap rate nor GRM is a magic bullet, and by themselves should not be relied on by real estate investors to make a real estate investing decision, each does provide the real estate investor something of value.

Gross Rent Multiplier

Gross rent multiplier is computed to show the ratio between the price of the rental property and the rental property’s gross scheduled income. GRM tells the investor what the property price is based upon each $1 of annual gross possible income.

For example, if a duplex is priced at $300,000 and has annual gross scheduled income of $30,000, the investor would know that the duplex has a 10.0 GRM—the price of the duplex is 10 times the annual gross income.

HINT: Consider GRM as the number of years it takes the gross income to equal the sale price and you will get the idea.

The advantage of using GRM is that it is a quick way for a real estate investor to take a reading on a property’s price—either when comparing it to the GRM of sold properties, or the GRM of other properties currently for sale—without the need of a calculator.

The primary disadvantage of GRM is that it uses the gross income and does not consider either vacancy rate or operating expenses.

Capitalization Rate

In practice, cap rate expresses the percentage rate between a property’s net operating income to its value, or sale price.

For example, if the same duplex priced above at $300,000 has a net operating income (NOI) of $21,000, the capitalization rate would be 7.0%–the NOI is 7 percent of the sale price.

The advantage of cap rate is that it measures NOI–gross income less vacancy less operating expenses—that essentially becomes the amount of money available to make the loan payment, and as such, provides a good first-glance assessment of a property’s ability to pay its own way.

Summary

There is no one ideal GRM or cap rate, nor does either alone provide a true picture of a property’s profitability and should not be used to make a real estate investing decision without consideration for other factors about the investment property.

Moreover, the old adage, “garbage in-garbage out” is accurate about both GRM and cap rate. The measurements can be helpful to a real estate investor conducting a preliminary survey. But only when the numbers used to make the computations are realistic.

A security deposit is money paid by a tenant to the property owner before the tenant moves in and occupies a unit in the owner’s rental income property.

The purpose of the security deposit is straightforward: It assures the investment property owner that the tenant will pay rent on time and will keep the rental unit in good condition.

When the tenant terminates the rental agreement and moves out of the unit, if there is no rent money owed or any damage to the unit, the security deposit is returned to the tenant plus interest—as dictated by state law–but typically only for the number of months that the rent is paid in full and on time.

Okay, here is a list of seven things about security deposits real estate investors should know the next time they rent their rental income property.

1. Security deposits should be kept in a special escrow account.
2. Rent collected in advance of the first month is not considered part of the security deposit agreement.
3. Security deposits typically cannot be held for normal wear and tear to the unit.
4. Security deposits can typically be held to pay for damage to a rental unit caused by the tenant, a family member, or a guest.
5. Security deposits can typically be held for unpaid rent.
6. Security deposits can typically be held to pay for the replacement of any property that may have been taken by the tenant.
7. Security deposits can typically be held to pay for any necessary cleaning required to restore the unit to its condition before the tenant took occupancy (excluding ordinary wear and tear).

Security deposits are a valid way for real estate investors to create a tenant’s interest in the property. Obviously, a tenant that has a portion of his or her money tied up in the property tends to be more motivated to be responsible and to keep things in reasonably good condition.

A smart rental income property owner will always ask for it.

Real estate investors who become a property owner soon discover that real estate investing is as much a people business as it is financial.

Tenants sometimes have disputes with other tenants in the building. In turn, a complaint is usually brought to the income property owner that is usually dealt with quickly to prevent things from becoming ugly.

But how much can a rental property owner do to resolve disputes between the people who occupy a rental income property like an apartment complex?

The truth is that most state laws restrict the amount of control and power a property owner actually has at an income-producing property. Even if you wanted to do something about the complaint, there is little could do.

If a tenant in the apartment building is annoying other tenants with loud music, for example, you are limited to speaking with the tenant or perhaps sending a letter, but that is about the extent of what you can do. You certainly cannot walk into the unit and turn the volume down or take the radio—that might get you arrested.

Eviction of the tenant is always a possibility, but if the tenant pays the rent on time, you would have to evict for reason of nuisance.

On the other hand, though you may not want other tenants to be annoyed by the rudeness of one tenant, you also do not want to lose an otherwise good tenant or create a bad situation with an eviction.

The best advice for the real estate investor is to explain to the complaining tenant that you will speak with the tenant in question, but if the matter does not clear up, the complaining tenant should contact the police and report the behavior of the problem tenant to authorities.