@Horacio Gutierrez For buildings of that size, GRM and CAP rates are irrelevant. 2-4 unit buildings are sold based on comps. Granted, in investor-heavy areas, the value will reflect the expected/potential rents, the ultimate value is based on what other similar buildings have sold for. With such a small building and number of units, using a GRM will be highly inaccurate because slight changes in condition, vacancy, etc won't be absorbed by better performing units as they would be in a 20+ unit building.
You have to create it yourself in reverse. For example, find the last 3 properties that sold, and compare each:
Example -
Property 1 Sale Price: $200,000
At sale, how many units were rented, what was their rent?: $500 per month x 4 units X 12 months = Gross Rent of $24,000 (you don't factor in vacancy here, gross would just be if all units were full.
GRM: Sale Price divided by annual Gross Rents
$200,000 / $24,000 = 8.33 GRM , or 8.33 times the annual gross rents.
Repeat with two other similar sold properties and then average for market GRM.
The higher the GRM, the less the risk; the lower the GRM, the higher the risk.
If it's 2 times gross rents, that's either a great great deal, or a high risk deal with lots of potential vacancy or higher level of management requirement...
@Horacio Gutierrez For buildings of that size, GRM and CAP rates are irrelevant. 2-4 unit buildings are sold based on comps. Granted, in investor-heavy areas, the value will reflect the expected/potential rents, the ultimate value is based on what other similar buildings have sold for. With such a small building and number of units, using a GRM will be highly inaccurate because slight changes in condition, vacancy, etc won't be absorbed by better performing units as they would be in a 20+ unit building.
So are triplexes and fourplexes sold in los angeles based grm or comp sales or both?
An appraisal of a 2-4 unit building will be based on the comps. However, the price the comps sold at could indirectly be based on a commercial metric like grm which would be derived from the cap rate if the majority of buyers are cash investors. But even so, the comparable model still stands, with adjustments made for condition and location. You can use the GRM to decide if a particular property is a good deal for you based upon your personal investment goals, but the market value will be dictated by the comps as most buyers (ie the market) will purchase w/ financing (which uses an appraisal and therefore the comp model).
Further, you are doing yourself a disservice by considering commercial metrics on a small building like this. CAP rates and GRMs are based upon LOTS of units averaging expenses across all of them. With 2-4 units, you just aren't able to average expenses across all units the same as you could a much larger complex. Its like using a fixed % for repairs or capex. If you use 5% repair expense on a $500/mo unit, that's only $300/yr. That could get chewed up in a single HVAC service call. Whereas if you use 5% on a $3000 unit, $1800 (5%) might be a bit high because you have a higher quality of tenant.