GRM vs. Cap Rate

8 Replies

When determining the value of a 3-4 unit property, which is more useful- the Gross Rent Multiplier or the Capitalization Rate? What do you guys prefer? Why? 

I'm looking at listings to practice "running the numbers" ahead of doing my first deal and am interested in how you all determine an offer price. Thanks for the help!

generally speaking, 3 or 4 unit residential property is valued using comps. GRM and Cap is more in the reign of commercial (5+ units, apartments, retails). When I'm evaluating a deal, I look at the rental income and expenses, and craft an offer based on where they are now (if not fully rented, reduce value, etc.)

@Rusty Whitney

Welcome to BP.

For 4 units or under, GRM is used NOT cap rate when the appraiser do income approach. They are more weighted upon sales approach as they are still considered residential.

Hope it helps.

James Syed, Real Estate Agent in IL (#471018522)

Thanks for the feedback guys, I'll take this into consideration

Jeremy Pace, great post! I'm currently evaluating several opportunities in Cleveland/Akron, OH and they range from 4 - 11 unit. Do you find that relying on the "basic numbers(income-expenses=profit, if that info is available) is a trusty way to determine whether or not I should move on a deal? If a cap rate is present, in the property details, what would you say are desirable-intriguing return rates for you as investor?

Currently, I'm trying to check under every stone to make sure I don't get bit by unexpected expenses. For instance, even after factoring an additional 10%, for adding property management for the 11 unit, and a wrapped mortgage note (100% financed) I'm still getting around $2,200 cash flow/month. Rents seem a bit low for the area, as well. My last couple steps are to contact a contractor/realtor to get on and in the property. Any advice or willingness to partner would be welcomed!

Best,

Kyle

It's very simple.  Most investors buy for either monthly return on their investment (Cap rate) or appreciation of the subject property (long term appreciation)   . Or a combination of both.  The area determines the which it is.

 I invest in 3 different areas.  Miami Beach Fl, Baltimore MD and Bowie MD (A suburb of DC).  Miami Beach the cap rate is about 3%-5% but the appreciation is about 10% per year.  Baltimore City the Cap rate or Return is 20%-25% but I expect about zero appreciation in the property over the years.   Bowie Md is a combination of both about 7-8% cap rate and about the same in annual appreciation.  Most investors are looking to make at least 10% through one method or a combination of both.  A straight Cap rate is in my opinion much or reliable than trying to predict appreciation in an area unless you are REALLY in touch with the local market.

Just another Note if you are new to investing.  Do not rely on "Projected" income numbers.  Seller's and Realtors are notorious for inflating these numbers to make a deal look better than it actually is in real life

Hey Rusty Whitney why not use both? These are assets and the more metrics you have the more informed your decisions are.

Personally, I don't think these are mutually exclusive. As a Multifamily investor, I use both numbers to make decisions.

GRM is calculated based on the GSI [Gross SCHEDULED Income] and not the current rents. Yet, this metric does have its merits.

So I'd advice you to always use actual rents and be cognizant of the leases and when they expire.

There is another metric called Rent-to-Value ratio. If a property is, say, $100,000, you should expect that the rent shouldn't be anything less than $800/month. So the RTV is 0.8%; however, if you're able to get >= 1% then even better.

Good luck! Thanks! - Ola

Originally posted by @Rusty Whitney:

When determining the value of a 3-4 unit property, which is more useful- the Gross Rent Multiplier or the Capitalization Rate? What do you guys prefer? Why? 

I'm looking at listings to practice "running the numbers" ahead of doing my first deal and am interested in how you all determine an offer price. Thanks for the help!

 Direct sales comparison is the best and most accurate way to value 3-4 unit properties.

Cap rates are useless because there is no source for verifiable cap rate comps.

GRM is a method that could be used as all you need is a knowledge of market rents and sales price.

The caveat with that is you need to use comparable properties with similar expenses.

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