By using this exercise, you can quickly estimate the value of most buildings with just the asking price (or selling price) and the Gross Annual Income. Apply the formulas below to complete the rest of the calculations.
| Asking Price (Known) | $2,340,000.00 |
| # of Units | 13 |
| Cost Per Door | 180,000.00 |
| Financing 80% LTV | 1,872,000.00 |
| Gross (Known & Presumed Correct) | 280,800.00 |
| GRM | 8.3 |
| Expenses 50% | 140,400.00 |
| CAP Rate | 6.02 |
| NOI | 140,400.00 |
| Financing @ 5% 30-year term | 119,888.00 |
| Profit after Debt Debt Service Ratio | 20,512.00 1.17 |
Cap Rate: Net Operating Income / Purchase Price
GRM: Asking Price / Gross Rental Income
Cash on Cash Return: (Net Operating Income – Annual Debt Payment) / Down Payment
Expense vs Income Ratio: Expenses / Effective Gross Income
Income After Debt Service: Net Income – Annual Financing
Debt Service Coverage Ratio: Net Operating Income / Annual Mortgage Payment
Cost Per Door: Purchase Price / Number of Doors
Profit Per Door: (Operating Income – Annual Debt Service) / Number of Doors
This simple exercise can be done on the back of a Tim Horton’s Napkin by knowing two numbers, the purchase price, and the gross revenue. And nine out of ten times if you follow this little exercise, you will have more accurate value for the building than the person presenting it.
With the rising cost of utilities and the reporting of expenses to satisfy financing, these buildings will have an income/expense ratio of 50% with a plus or minus of 5%. Larger buildings will have a much lower expense-to-income ratio, and large retrofitted buildings can have a ratio as low as 25%.
In this example, the four key indicators are the cost per door, gross rent multiplier, cap rate, debt service ratio, and profit after debt.
The price per door is obvious; however, it has many implications and should be the first number reviewed. The marketplace of the subject property will have an average price per door and buildings with a higher-than-average price per door may not cash flow as well. Buildings with a low price per door may offer an opportunity to increase that number to or above the average.
The Gross Rent Multiplier (GRM) is a straightforward metric to calculate and serves as a valuable complement to the Capitalization Rate (Cap Rate) when these two metrics are evaluated together. There is an inherent relationship between the GRM and the Cap Rate, typically manifesting as a natural spread between the two values. The lower the GRM and the higher thr Cap Rate, the more favorable the investment scenario.
When both the GRM and Cap Rate are analyzed in tandem, they provide a more comprehensive view of a property’s overall financial health and cash flow potential. This dual analysis helps investors make more informed decisions by offering insights into the property’s profitability and risk profile from multiple perspectives.