That Help You Evaluate Your Investments
Gross rent multiplier (GRM)
provides a means of comparing properties recently sold with subject. It
represents the current supply/demand interplay in the market for income
properties of the same type as subject.
Cap rate is really a
comparable yields method on analyzing investment potential. When one is
investing in real property, one is taking the position that the rate of
return will be greater and the benefits of ownership will out weigh a
"safe" investment. When funds are put into an apartment house,
liquidity is lost and management responsibility has been accepted.
There is always an element of risk. Usually, the investor expects to
see management skills improve the rate of return, and that real estate
will appreciate at a rate in excess of the general rate of inflation.
The investor is in a position to control the risk factor.
Leverage of capital is another benefit of
investing in real estate. An investor can receive 100% of the benefits
of ownership with an up front investment of a fraction of the purchase
price. Traditionally, the downpayment for an investment property has
been 30%-40% of the purchase price.
Today, you may be able
to purchase investment real estate with 20%, 10% or even 5% down. (Of
course, the lower your down payment, the lower your monthly cash-flow.
Your personal financial strength and credit ratings will greatly affect
the loan programs you will be offered.)
Here is an example of
why real estate may be your best possible investment: If you purchase
an apartment building for $1,000,000, make a 30% down payment, keep it
for three years and it goes up in value 30% in those three years, your
return on your investment is not 30%. YOUR RETURN IS 100%!
Of course, this
example is rounded for clarity and there are costs associated with
buying and selling. Some years real estate goes up in value much more
than 10% and some years it does not increase in value at all. In rare
instances, real estate temporarily goes down in value. Real estate is a
Real estate is not a
estate is a
Mortgage lenders use this, as
the ratio can be interpreted to mean that the cash available for the
debt service is a percentage of the amount necessary to cover the total
mortgage payments. A bank may take a position that in order to make a
loan, the cash available to pay the bank debt is 160% of the amount
necessary to cover the total mortgage payments.
Michael Cornell today
Commercial Brokers Association