For a real estate investor to be successful, she must make wise decisions when determining which properties she should invest in. There are many different strategies and calculative formulas that a real estate investor might use to choose a property. However, there is one piece of information that each investor needs to know: gross potential rent.
What Is It?
In a nutshell, gross potential rent (GPR) is the total amount of income a real estate investor can expect to receive from a purchased property based on "market rent." To determine the GPR, the investor assumes that all of his units are occupied and that each tenant pays all of his rent. Another term used for GPR is gross potential income.
Market rent is is the amount of money a similar piece of property rents for in the same geographical location. To determine market rent, ask the real estate agent or broker to see how much similar properties rent for in the area. You can also contact other rental offices to see how much similar units rent for.
Importance of GPR
When investors purchase a piece of commercial or residential property, they pay a flat purchase price. However, the GPR lets the investor know how profitable the piece of property has the potential be. It is the first thing you need to know to determine the value of a piece of investment property.
Calculating Gross Potential Rent
Once you know the market rent, you are ready to calculate GPR. To calculate GPR, multiply the market rent times the total amount of units. For instance, if the property has 25 units and the market rent is $750 per month, the GPR is $18,750 per month ($750 x 25) and $225,000 per year ($750 x 25 x 12).