**If you’ve been an avid follower of GoodPlace blog posts, then you’ll notice that we have been slowly moving away from “infotainment” type of articles and starting to produce more serious stuff.** OK, I’ll be honest with you – writing about “cold” property topics is as yawn-inducing as watching lawn bowling on a sleepy Saturday afternoon, and truth be told, that instead of writing about how the second Penang bridge is going to hike up the prices of properties in Batu Kawan, I’d rather dig the *innerwebz* to find funny pictures for our mutual amusement –

One of the main perks with running GoodPlace is that I get access to lots of really knowledgeable people in this industry who are always generous with their advice without expecting anything in return (which effectively rules out those* “teach-because-they-cannot-do”* Guru types who are preying on people’s gullibility for a quick buck). For example, we have welcomed yet another seasoned investor in the Mentor’s mastermind group (read about our past meetings here, here and here), and he has offered to write us a guest post detailing some of the methods that he use to evaluate potential investments.

An ex-lecturer in college level maths, **Penrose*** (nicknamed after the great Oxford mathematician, Sir Roger Penrose)*, he had an epiphany one day to apply his formidable number crunching prowess to buying and selling properties. Since then, he has never looked back, having bought and sold some $24 million worth of properties in the last two years.

And like almost every successful property investor I know, he’s coy about his methods, but since he’s new in the Mentor’s group I could still arm-twist him into spilling some of his secrets. ðŸ˜‰ Trust me, guys, this dude is as legit as it gets.

As you should know, we’ve now launched GoodPlace Homes, and most of my time now is spent as a techie rather than a blogger given the amount of firefighting that I have to do on a daily basis now. So, if you’re willing to write for GoodPlace, let me know – you know where to find me. ðŸ™‚

## Five Metrics That Will Make You Rich

*By Penrose, GoodPlace’s Geek In Residence (P/s: You can contact me by sending an email to Khai Yin)*

**I‘m probably not your typical property investor because I do a lot of things the typical investor won’t do.**

For example, I almost never buy a property just because I “like” it.

You see, I’m in this to make money, and I am absolutely clear headed about what I will and will not invest in.

So this is what I do. I collect the numbers, put them into this little 10Mb Excel spreadsheet that I have built over the years, and *voila*, it will magically tell me if a property is a hero or a zero in an instant. There’s zero guesswork involved.

**The first thing you’ve got ask yourself is if you’re a businessperson, or a hobbyist.** If you’re the latter (and there’s nothing wrong with it, mind you), then it’s alright to be completely driven by your own prejudices, likes and dislikes, and be let entirely by your own gut no matter *irrational* it may be….

…but if you’re in this first and foremost for the money, then you’ll need something *more* than just your gut preference for a mid-sized condo with a KLCC view. In short, you will need an *edge*. Just ask any successful investor (no, not a Guru). Heck, go ask Khai Yin. He’ll tell you the same.

Before I saw the light, I spent years trying to make ends meet as a lecturer in a local A-Level college in downtown KL. I guess don’t have to tell you this, but in case you don’t know, there’s absolutely no money being a mathematics teacher in Malaysia.

Realizing this, using the number crunching skills that I have honed over the years both as a student and a teacher, I have successfully retooled myself and re-applied my skills in the money-grabbing field of property investment. And I’ve never looked back since.

### My Edge In Property Investment

Being absolutely cold in my analysis means that I can avoid the biggest mistake that a buyer or seller of property can ever make – getting clouded by mental biases (like what Khai Yin has previously wrote about)…

… and when you have the numbers squarely on your side, you can afford to push the envelope and do things that the regular “go by the gut” small-time investor won’t or can’t do.

Now I am **not** at the liberty of sharing my aforementioned spreadsheet with you* (for obvious reasons that I don’t like extra competition in my space, thank you very much)*, I am able to let you in on one thing, and that’s what I am going to tell you next.

### The Five Magic Metrics That Will Make Your Investment Rock

**As a mathematician, I’m trained to do one thing especially well, and this is it…**

I can look at a series of numbers and work out a formula to predict what comes next in the series. That, really, is what math is all about…Â processing a bunch of seemingly random numbers in a series and finding the relationship between them. We can then use this relationship (in the form of mathematical equations) to *predict* what’s coming up next in the series.

**How this relates to property, you ask?**

It’s pretty simple, really…

You see, if you have enough data at your disposal, and if you have the mathematical chops to process the data, then you’ll be able to figure out the formula that you can use to predict whether a buy will be profitable or not in the future.

To give you a head start so that you don’t have to waste time deriving these formula from first principles, here are the five basic metrics that I regularly use to evaluate the viability and the profit potential of property buys. **Disclaimer**: what I personally use are an advanced *variation* of these metrics, but you should come up with your own once you get good at this game. *In short: apply your own twist so that you have your own edge.*

** Metric #1: Cash On Cash Return (CoCR)
**

Here’s the formula –

Pretty straightforward stuff. Very simply, you measure the ratio between *(1) how much cash you generate from the property in a year (before tax)*,Â and* (2) the amount of cash you forked out to buy it*.

**CoCR is a quick-and-dirty, back of the envelope type of calculation that you can use to quickly filter out dud properties**. In fact, this is the first metric that I calculate to eliminate at least 90% of the opportunities that come to me every week.

There are some limitations to the CoCR which you will need to know. More on this later.

** Metric #2: Gross Rent Multiplier (GRM)
**

Here’s how GRM is calculated –

The GRM is calculated by dividing the price of the property with the gross income generated by the property. As I am primarily a cashflow investor, I look for properties with good rental returns, and as such, the GRM metric is useful to me as an indicator of what’s the cashflow generating potential of a property.

**Interestingly, the GRM can also be used as an alternative to the traditional methods of property valuation (usually calculated via the cost method or the comparison method)**. Rearranging the formula above, the price is simply the multiplication of the GRM and the potential gross income. This means that you can value a property by (1) getting GRM data of properties in the same area, and (2) multiplying it with the rental income.

** Metric #3: Breakeven Ratio For Occupancy
**

The BRO is not common, but it’s useful as a second level filter once a property passes the CoCR or GRM test. This is how BRO is calculated –

To put it simply, you calculate BRO by adding up all the cash outflow associated with the property (usually the operating expenses and the yearly debt servicing amount) and dividing that figure with the rental income. **This metric tells you what the occupancy rate to aim for before you start generating cash from your property.**

I have found the BRO to be especially relevant when you’re wholesaling *(always a good metric to present to investors because near-term ROI is a strong proposition)*, or if you’re into student rentals.

** Metric #4: Operating Expenses Ratio (OER)
**

The OER is the ratio between the property’s operating expenses and the rental income:-

**This metric measures how much your income from the rental will be spent operating the property.** Everybody’s threshold varies, but I typically go for a **<50%** cutoff point, especially if gearing is high since I will then also need to make allocations for debt servicing.

Also, I usually look at how the OER is trended throughout the years because as buildings get old, operating expenses go up, and I will need to see some *proof of increasing rental rates* before investing. I suggest that you do the same.

** Metric #5: Internal Rate Of Return (IRR)
**

OK, this one’s a biggie, and so I’m just going to put this rather scary looking formula upfront –

This formula is used to calculate the **Net Present Value (NPV)** – which we will cover later in the series.Â R here is the interest rate, t the time period, and P the initial investment. You get IRR by solving for R by setting NPV to 0.

You can use the IRR as a* comparison metric* between properties as it tells you which project are going to give you the best bang for your investment buck over the time period (t), given the amount of investment P that you put down initially. Calculating IRR is usually one of the final steps I take *after* I filter out the false-starts (using the four metrics above – CoCR, GRM, BRO and OER); I would tabulate the values for the property side by side, and then pick the ones with the highest IRR values.

Here’s the dirty little secret about IRR: **even most seasoned hands in the property industry don’t know how to calculate this metric.** I’m dead serious! Most would just rely on a spreadsheet or a scientific calculator to compute the IRR value. Not knowing the mechanics on how these metrics work is a disadvantage – which also means that if you do know how they work you’ll have an edge over the others.

## Coming Up Next

**This article is only the introduction to more guides on how to use geeky math to make money in property.** A little light on details so far, I know, but bear with me.

In the next guest blog post here at GoodPlace (depending on Khai Yin, since, well, I don’t own this site), I will elaborate more on these metrics (especially on their LIMITATIONS) and share some case studies on how to use these to make profitable property investments with **zero guesswork**.

With hardcore science and math on your side, you can do what the real McCoys do and leave the mumbo jumbo Guru bullcrap like *“the law of attraction”*, *“rich dad fake dad”* and *“think and grow rich”* to the Average Frustrated Weekend Seminar Junky who doesn’t know any better.

Great stuff. Can’t wait for part 2 and to create my own spreadsheet.

Thank you!

Thank you @Amy; glad you liked it!

Great work as usual….keep up the good work

What is the minimum acceptable figure for CoCR then? I know that the higher the casflow against cash outlay the better, meaning that as the top number increases while the bottom number remains constant means that the CoCR number will be higher. The higher the better.

@Kamil: we are publishing a follow-up blog post on this – this is a particular pitfall that most are unaware off. Should be out in the next 2 weeks.

I opine that cash on cash return is not applicable to Malaysia property market. Good commercial property only have 4% rental return if you are lucky to find one. If you pay 20% down payment and get an interest only loan (which is also available in Malaysia), you can only get a break even cash flow. Even you buy a good condo, the net rental yield is only 4+% after deduction of maintenance fee ; moreover you need to allow for one – two month unoccupied a year, please enlighten me on how to get a positive cash flow when you buy the property during first year.

I am not interested on low cost or low medium cost apartment which needs to spend a lot of time on tenant management. You may drop me a personal email.

Hey man,

You’re setting the bar pretty darn high for a property portal. In fact, you have no peer. Good stuff. I am pretty sick and tired of the lelong.com.my look of the majority of Malaysian websites.

Keep up your excellent writing!

Thank you, Andy! Am deeply flattered. ðŸ™‚

Hello Khai Yin, myself being an engineer, data and statistic driven individual, your article is the best. If we calculate and compare quality information volume (%) by number of words, there is like no 1st runner or 2nd runner up.

Last, would like to inform you, your newsletter sign up doesn’t work. It shows message like the newsletter list is no longer active. Can you add me in manually? thanks!