All Forum Posts by: Ray Dipasupil

Gross rent multiplier is a much more crude form of evaluating a property than cap rate. Cap rate is just a snapshot in time and doesn't take into account the longer terms benefits and risks. it is only a  measure of current cash flow. 

In general high cap rate means more cash flow but generally higher risk. Low cap rate means lower cash flow but with corresponding lower risk. The point being that the  marketplace rewards higher risk with potentially higher cash flow. The market offers lower rewards for safer lower risk properties. 

However for a given property, paying a price that leads to a high cap rate (ie: lower price) leads to a more profitable and safer deal. Paying a higher price for the same property give you a lower cap rate and lower and Less safe return. A property doesn't how much you paid for it. It doesn't say oops he paid to much now I have to be a less risky property because I have a low cap rate.  The property doesn't change and offer less cash flow because you bought it well under market. 

You will find some very strong opinions regarding cap rate. However there is no one right answer.  You also have to consider you are not likely to get accurate enough data to calculate cap rate on small multi family.

So you can use cap rate or GRM as a crude screening tool but you should run the actual numbers, as best as you can determine them, when evaluating deals.