You can often find data relating to the GRM from real estate professionals, investor groups, and countless online resources. Property Value= Annual Gross Rents x the Gross Rent Multiplierįor this calculation to be useful, it is essential to know the current Gross Rent Multiplier for nearby comparable properties. Where these two methods differ is the fact that the rate used for the Gross Rent Multiplier approach is based on gross rent, whereas the income approach uses net operating income.Ĭalculating the Gross Rent Multiplier Approach goes like this: You can obtain the value using a gross rent multiplier in a manner somewhat similar to the income approach. Additionally, this approach does not take into account vacancies, or losses from collections, or unforeseen repair or maintenance expenses, which can throw off its accuracy significantly in certain situations. Unfortunately, this approach does not work as well with unique or one-of-a-kind properties that have few nearby comparables. The main benefits of this method come from the fact that it uses actual market data, which gives investors a snapshot of the realities on the ground in as close to real-time as you're going to get in the commercial real estate business. This approach is commonly used in the multifamily and residential sectors, for instance, comparing two thirty-unit multifamily apartment buildings or two residential homes with similar characteristics and square footage. The sales comparison approach, or market approach, uses recently sold comparable properties and asking prices of currently listed properties as data points to determine the current value of a similarly appointed property. Essentially, this method converts income into value by placing income as the primary determiner of value. The Income Approach determines value by taking into account the market rent that a property can reasonably be expected to generate, as well as the potential resale value of the property. Income capitalization, or the income approach, is a valuation method that puts the expectation of future benefits first and foremost. When rental income is lost due to units going unrented or owed rents being uncollected, those are categories of vacancy and collection loss. It stands for "Taxes, Utilities, Management, Maintenance, and Insurance." This term is shorthand for property-related expenses. The ROI or return on investment is the cash flow that remains after debt service, which is then divided by the cost of the investment in question. This term is also colloquially referred to as the ‘price per pound’ of a building. To determine the price per square foot, you take the price of the property and divide it by the total square footage. NOI, or net operating income, is equivalent to the rental income of a property, minus any ownership related expenses, like maintenance, staff, etc. Cap rate is similar to GRM in that it represents a multiple to earnings, but a notable difference between the two is that the cap rate takes expenses into account, while GRM looks at the total inflow of rental income. If you take the sales price of a property and divide it by its annual gross potential rent, you come up with the gross rent multiplier. Gross rent is the total amount of rent stipulated in a commercial or residential lease, divided up among the months for which the tenant is responsible, gross rent may also be referred to as effective gross rent. This is the amount of collectible rent from a multi-tenant property, assuming that all rents are paid in full and that the property in question is at maximum occupancy, with no units left unrented. The cost per unit is the price of the property, divided by its total number of rental units.ĭebt service refers to monies spent to cover the repayment of principal and interest on a debt within a given time period, i.e. Cap rates are usedto represent the expected rate of return for a given commercial property. The cap rate is a property's net annual rental income, divided by the property's current value.
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