In determining if a property is a good investment, which is more accurate - Cap Rate of GRM?

In Buying Property - Asked by Dalia J. - Feb 3, 2011
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Answer(s)

Rick L.
Appraiser
Cleveland, OH

In all reality thay repressent the same thing a ratio that compares sales price per income. The Grm does not consider expences, so if the management of the building is wastful it would show up in the NOI.
Rick Linhart

Feb 4, 2011
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William C.
Broker/Agent
Pasadena, CA

Hi Dalia,
I generally prefer the GRM on multi-family investments. The cap rate is too easily manipulated (by not including all the expenses), so that a property looks like a better investment than it really is. Your best bet is to look at the GRM, cap rate, cost per square foot and any other indicators all together, and compare them to similar indicators on recent comparable sales.
Good luck,
Bill Clark

Feb 4, 2011
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Evan Keith L.
Broker/Agent
Rockville, MD

I am not a big fan of the gross rent multiplier. If you have two buildings side by side that are exactly the same and that garner the same rents, but one has twice the expenses, the GRM calculation would come up with the same exact value for both buildings. As one party indicated, cap rates can be somewhat manipulated. However, any broker worth his or her salt can figure out where that is occurring, and the GRM just isn't very helpful in my opinion.

Feb 4, 2011
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Ed B.
Broker/Agent
Denver, CO

I prefer using a CAP Rate over GRM. I know market vacancy, what it costs me to operate a building and what it will cost to leverage the property. All that's left is what I feel I should get for a return based upon the location and quality of the investment.

Feb 4, 2011
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Devin C. G.
Broker/Agent
Irvine, CA

Neither are the best - Both are only snapshots of performance on a given date and time. They are both fallable to variables. They are good starting points and refrences, but neither should be a baisis for accepting or rejecting an investment. The "CAP" on a building can be calculated and costruced a number of ways. many external and internal factors affect CAP rates includng prevailing intrest rates, alternate investmetns as well as supply and demand in a given area. Start with a general knowledge for "general" CAP and GRM rates in a given area, and use those as benchmarks, not imperical evidence that at or below a specific number, you should or should not move forward.

Feb 5, 2011
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