Posted by Paul Ness, MAI on November 21, 2003 at 07:01:32:
Interesting. I always equated the term “rent” to monthly and “income” to annual, since the residential forms use the term GRM, which is always based on monthly. Around here we never use the term GRM in commercial appraising. I never heard of using the two terms to distinguish between actual income versus potential/effective income.
What is a “GRM” - Posted by Monica
Posted by Monica on November 19, 2003 at 07:39:13:
Newbee here so this might be a stupid question. But I have been looking for apts. for sale and I don’t understand what a “GRM” or a “CAP” is. Every listing I see have numbers next to them, please explaine?
Re: What is a “GRM” - Posted by ray@lcorn
Posted by ray@lcorn on November 21, 2003 at 09:03:30:
As you can see from the discussion below your question engendered, azround here there are no silly questions. Even among the pros (that “MAI” after Paul’s and Robert’s names is the gold standard of professional appraisal certifications) there can be differences in terminology and meaning.
While they gave you the formula for calculating GRM (also known as “times gross”) and a Cap rate, I’d like to add how they are used, and why you see them quoted in ads.
GRM first… as you can see from the way the Gross Rent Multiplier is calculated, sales price/annual income (I’ve always used annual guys), it doesn’t really tell you much about the property. It says nothing about the expenses, profitability or condition of the property. It is just a rough rule of thumb measure to allow comparisons between a wide range of properties of the same type. For years my dad would look at an apartment deal if the price was less than “nine times gross”. That meant he would look at the annual rent, multiply by nine, and see if the sales price was less than that. The average GRM for a hotel is 3.5 times gross. Every property type has an average GRM, and there is math that forms the basis for the average, but as an analytical tool it is pretty much useless for anything beyond establishing initial interest or comparing to other properties in the same market.
A Cap Rate is short for “capitalization rate”, and can be figured as Robert noted below… NOI/sales price. At its most basic level, it reflects the return on the investment for one particular year as if the investment were bought for all cash. It again is a unit of measure that allows investors to compare investments over a wide range opf properties and in theory be comparing aples to apples.
But that is the very tiniest tip of the iceberg… so much has been written here about cap rates and how to use them you could and should spend considerable time in the archives to really understand the subject. I put together an article that explains the proper use of cap rates and synthesized the thoughts of many of the regular posters here, including Paul Ness who answered your question. That article can be found in the How-To Articles section of the website under the title “What’s it Worth? Deriving Your Capitalization Rate”. The direct URL is http://www.creonline.com/articles/art-216.html
If you’ll read that article and gain an understanding of the concepts it presents, you’ll be miles ahead of the game. As always, bring any questions back here and we’ll all jump in to help.
Best of dealmaking,
Re: What is a “GRM” - Posted by Paul Ness, MAI
Posted by Paul Ness, MAI on November 20, 2003 at 10:36:26:
Actually Robert is not exactly correct. Gross Income multiplier is sale price divided by annual gross income, either potential or effective - which is identified as either PGIM or EGIM. Gross rent multiplier is sale price divided by total monthly rent.
Re: What is a “GRM” - Posted by Robert TX
Posted by Robert TX on November 19, 2003 at 20:31:16:
GRM - gross rent multiplier. It is calculated by dividing the sales price by the total potential gross rent of the property on an annual basis. You may also see GIM (Gross Income Multiplier) The GIM is calculated by dividing the sales price by the Gross Potential Income of the property on an annual basis. The difference between the gross rent and the gross income is the other income such as deposit forfeitures, late fees, etc.
The EGIM (Effective Gross Income Multiplier) is calculated by dividing the sales price by the Effective Gross Income of the property on an annual basis. This is the amount of income that is actually received versus the potential amount of income (potential income less vacancy and collection loss.
CAP - cap rate, capitalization rate. It is calculated by dividing the net operating income by the sales price.
Re: What is a “GRM” - Posted by Robert TX
Posted by Robert TX on November 20, 2003 at 15:24:40:
In my area of the country GRM’s are calculated on an annual basis for commercial properties and monthly for residential properties. Since the questions was posted on the commercial board I gave the commercial answer.
PGIM is not used here but is stated as GIM. I agree with you on EGIM.
These differences in definitions are local variations of the desire to come up with a benchmark for comparison. There are variations in many definitions. This indicates the importance of understanding the terms as they are used in your market.
As an aside, the definitions of a single net, double net, triple net, and absolute net lease are even more variable across the country and can even vary significantly within a local market between brokers, owners, and property types.
Robert J. Thompson, MAI
San Antonio, Texas