Income and expenses determine the value of a building
Two value determining approaches are Capitalization Rate and Gross Rent Multiplier. Both are quick and easy ways to decide how a property financially compares to other properties.
The Capitalization Rate (also known as CAP rate) is used with rental real estate to indicate the rate of return that is expected from a rental property. The CAP rate represents the yield of a property over a one-year time period assuming the property is purchased with cash.
The Gross Rent Multiplier (GRM) approach values rental property based on the amount of rent the building collects each year. This is before any taxes, insurance, utilities, and other expenses associated with the property are subtracted.
A property is purchased for $1,000,000, with an annual income of $92,868. Fixed operating costs and property taxes are $25,707 annually (does not include loan repayment).
To calculate its CAP Rate you subtract the operating cost of $25,707 from the income of $92,868 leaving net income of $67,172.
The capitalization rate formula is: $67,172 divided by $1 million = 6.72%.
If the CAP rate is lower than other properties, it is priced higher than the rest of the market.
A property is offered for $1,000,000, with an annual income of $92,868.
To calculate its GRM, we divide the sale price by the annual rental income.
The GRM formula is: $1,000,000 divided by $92,868 = 9.29.
If the GRM is higher than other properties, it is priced higher than the rest of the market.
This spreadsheet is used to give understandable comparisons for different properties currently on the market and what recently closed in the area you are searching. More importantly, use the spreadsheet to show the results of "value add" changes you could make. Cost, loan terms, expenses and income can be adjusted to see how a building will perform with your plan factored in. We can send you an interactive personalized copy of this worksheet in Google sheets to evaluate properties at your convenience, use this link to request a personalized copy by email. Are you ready to start search? Click here to get Zenlist and customize your search criteria for multiple neighborhoods, price or anything that is important to you.
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Tim Brent - Team Lead
Licensed Managing Broker
773-491-0792
tim@homes-condos.com
