french leaseback property

Gross Rent Multiplier - the Rubber Chicken of Commercial indicators.

Now a Rubber Chicken is pretty useless ... unless a practical joke. Let's take a look at the most useless in Commercial Real Estate.

Gross red multiplier (GRM) is a number that you will see on each of the pro-forma broker. And it will be measured as the "property value". "If anyone out there really defines the value of a property based on GRM ... I have to wonder what they're Smokin '. I'm not really sure what for a gross rent multiplier measures, but it is certainly not the value of the property.

GRM is calculated by dividing the property of the selling price or value of the gross profit potential.

Example:

A $ 1M property with an annual gross $ 100K Income Potential. This property has a GRM of 10

Price (Price) / Gross Potential Income = GRM
$ 1M / $ 100K = 10

The number of GRM can be thought of as similar to a price-earnings ratio of a stock. The gross rent multiplier is the time it would take you to pay for the property when you are actually collecting the gross profit potential and use it to acquire the property. For our example property: If you were able to collect that one hundred thousand dollars per year and you magically for all of it to pay for the ... it would take 10 years to make your purchase.

Pay attention to the gross rent multiplier.

It may help you compare prices between the different properties, but it is absolutely and totally useless as an estimate of the value to a focused investor returns. They focus on the return on investment. They focus on the Bottom Line. And the GRM is about as much help understanding your ROI as a rubber chicken.


Because of the gross rent multiplier only with the gross profit potential, it is flawed for two main reasons.

1) We are talking only about "Potential income" based on the broker the most optimistic forecasts of rents achievable. The base number has no basis in reality - especially if you have a property with upside. Think about it for a second ... if the seller could have these rents for this property, they would not for sale!

2) gross income begins at the top of the final statement. For each property, there is no relationship between the gross income, and net operating income (NOI) to the bottom of the bottom line. They need to know the real income and the actual expenditure to understand the actual NOI this property can be.


It is only when you understand the Net Operating Income that you can use your potential return on investment.

Our advice ...

If you use the term gross rent multiplier ... Just ignore it.

And if a promising feature is ask ... for the rent and the roles and finance of the Net Operating Income, as well as you can. With the bottom line net operating income and potential price in hand, you can calculate your return on investment.

With this solid, in fact, on the basis of numbers, you can bid on the basis in reality. Does not mean that the seller accepts it ... and at least start the negotiations with the feet on the ground.

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