Real Estate Investment analysis tools

Each RE Investor has some kind of buying criteria, then a formula through which s/he runs the numbers.   This can be fairly simple yet the simplier it is, the more prone to error it could be.  

Take for example the old GRM (Gross Rent Multiplier).  Some used to advocate that 6 times the gross annual rents would indicate the property could be a bargain, while 8 or 10 times would be much less of one.   This hardly tells an investor anything.  Reject this old methodology because your hard-earned cash is much too precious.  

Then we have the, "I don't want to pay any more than $XX,XXX per unit", buyer.   I don't want to beat up anyone, but this technique is even worse than the GRM method.  What if one unit has a beat up, old kitchen that needs to be gutted and replaced and the other unit has brand new, cherry cabinets, gorgeous granite countertops, and all the latest stainless steel appliances?   There is little reason for assuming an analysis for value based on this methodology yields much worth knowing.   

Next, we have IRR - the Internal Rate of Return.   A pretty good technique to analyze the present value of the future cash flows.   This is a tried and proven technique but it is better suited for equity investments than real estate (primarily because all rates of return should include the cost of exiting the investment).  If you have software that can crank out an IRR quickly, I find it can tell me an awful lot about the investment, but what it doesn't provide is a number that I can easily get my mind around; it is not often referred to as an industry standard; and most software completely avoids the aforementioned selling expenses -- a major shortcoming.  For a relative performance analysis, however, IRR can be very good (comparing one RE investment against another).   

The two analysis techniques I recommend most are Capitalization Rates (CAP Rate for short) and Financial Management Rate of Return (FMRR).    I'll spend some time going over why these two should be tops on your list for quick investment analysis techniques, but on another blog post.  

Until then, I invite comment!