GRM vs. Cap Rate

[Fred]

It just seems like anthing I've ever seen done before is basically taking the SA value, dividing by the market rent and putting the result in as the GRM. Viola! SA and IA are magically identical.

It seems to me the question you are raising is not GRM v cap rate, but rather what is the point of a second approach?

 

[Don Clark]

It seems to me the question you are raising is not GRM v cap rate, but rather what is the point of a second approach?

Ah! You are so right oh wise one

Many times the second approach, whatever that may be is not necessary or applicable given the property type and the scope of work. In some cases, it might even be misleading. That seems to be the case here.

 

[Alison Swain]

It seems to me the question you are raising is not GRM v cap rate, but rather what is the point of a second approach?

(*** Key the music. **) I can see clearly now, the rain is gone!

 

[GCJim]

The point of the GRM is that investors in the market sometimes use this 'technique' to value an investment property. More so in the past than now, especially for commercial property investments. But that's why residential forms have a place for it.
Note that it is a 'quick and dirty' rule of thumb type of calculation. All things being equal, a GRM doesn't accurately handle / account for property expenses on its own. (as in, 2 properties with GRM's of 10, but one property has twice the amount of expenses as the other. Both would yield the same value via the GRM, which is not true.) Nevertheless, if you can determine a reliable GRM from your market data, it is another valid 'indicator' of value.
Income Capitalization techniques are the norm with commercial.

 

[Kali the Boston Terrier]

Just to mirror what GC said, how do buyers treat ratios? In my market I had an old CCIM (who owns about 1/2 of the town as well). Tell me that he starts every deal with the rule of 1%, that the monthly rent is 1% of the market value of the property. Reflecting a Monthly GRM of 100. The more I thought about it the more it made sense (in terms of quick analysis) basically anything less usually meant that you were making a fairly good cash flow, but at an increased risk. Anything higher usually reflected a stable market with increasing values, but poor cash flows.

Now this is not a substitute for extracted rates or ratios, but it helps to explain where this stuff comes from in the marketplace.

 

[The Warrior Monk]

It's important to keep in mind that different rates/multipliers are appropriate for different situations; Most basic text books address this issue. Multipliers based on gross income have very limited application. The long and short of it is the properties from which the GRM is derived have to be very similar to the subject in terms of vacancy/credit loss & operating expenses, amongst other things. If not, a cap rate may be appropriate.

 

[Mr Rex]

I used to do some work for a local rental investor (aka slum lord). We were talking one day and I asked how he arrived at a price he was willing to pay for a house. He said the rents had to pay for it in 7 years. He had developed his own GRM of 84, although he didn't know the terminology. He went on to say that in reality it took about 10 years due to vacancy loss, damages etc. Again, he had an established OI ratio in his head and didn't need the OI form to figure it out. His family now has close to 500 properties, although as illustrated by the 84 GRM, these are not beachfront condos but rather "seasoned" homes in "urban" areas.

 

[Fred]

He said the rents had to pay for it in 7 years. He had developed his own GRM of 84, although he didn't know the terminology.

I like that: "the" terminology. The Brit term "years purchase" has more history and standing; and there are probably more people who use annual income than use monthly.

 

[Alison Swain]

Just to mirror what GC said, how do buyers treat ratios? In my market I had an old CCIM (who owns about 1/2 of the town as well). Tell me that he starts every deal with the rule of 1%, that the monthly rent is 1% of the market value of the property. Reflecting a Monthly GRM of 100. The more I thought about it the more it made sense (in terms of quick analysis) basically anything less usually meant that you were making a fairly good cash flow, but at an increased risk. Anything higher usually reflected a stable market with increasing values, but poor cash flows.

Now this is not a substitute for extracted rates or ratios, but it helps to explain where this stuff comes from in the marketplace.

The houses I'm looking at have GRMs of 155 - 175. That's after the declines of the past two years. Somehow, the train's gone way off the track. :Eyecrazy:

 

[Don Clark]

The houses I'm looking at have GRMs of 155 - 175. That's after the declines of the past two years. Somehow, the train's gone way off the track. :Eyecrazy:

And some that I have done have GMRM's of over 200. We have many properties that wiil rent for 6 months in the "off" season(Labor day to Memorial Day appx) and then rent on weekly basis for the rest of the year. In that case we have to annualize the rent, then apply a GMRM to it. In some cases, even with some SF's that are rented year round, the GMRM is still above 200.