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Home  >  Commercial Mortgage Articles  >  GRM Commercial Property Valuation

 
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Learn How to Quickly Determine the Value of a Commercial Property Using the Gross Rent Multiplier (GRM) Valuation Approach

A CommercialBanc Article Published on September 4, 2006
If you are applying for a commercial mortgage then you are well aware that commercial appraisals are expensive, often exceeding $2,500. Luckily, there are a few basic ratios that you can use to help get a good idea of the value of income producing commercial real estate.
The gross rent multiplier (GRM) is one of those methods. The GRM ratio is a capitalization method used for calculating the rough value of an income producing commercial property based on the property's gross rental income.
While it sounds a little tricky, it really is quite easy as long as you can get your hands on some basic information. To calculate the rough value of a commercial property using the Gross Rent Multiplier approach to valuation, you will need the following information:
  • GRM ratio - contact a local commercial appraiser, a local commercial real estate agent, or calculate a GRM on your own using recent comparable sales - more on this later -
  • Gross annual or monthly rents for the subject property
Once you have a GRM ratio and the gross rents for the subject property, you can calculate the property's rough value by simply multiplying the two together.
The calculation looks like this:
Value = Annual Gross Rents X Gross Rent Multiplier (GRM)
$640,000 = $80,000 X 8 (GRM)
In this example, a property that generates $80,000 a year in gross rental income is worth $640,000 based on a GRM of 8.
Wow, that was easy, but how accurate can the Gross Rent Multiplier (GRM) valuation method be based on such as simple approach? While using the GRM to value a commercial property has it's limitations, its actually quite accurate and make sense once you understand the basics of a commercial appraisal.
A commercial appraisal typically values a property based on a three tier approach: income, replacement, and sales comparison. The final value of a commercial property blends the income and sales comparison methods together to determine the property's actual value.
Since our valuation of a property using the GRM ratio depends on both gross income and recent sales, it only makes since that the GRM approach to valuation is quite accurate.
How to Calculate Your Own Gross Rent Multiplier - GRM Ratio -
So you called the local appraiser and he told you to take a hike, to put it politely! What now? Contact a commercial real estate agent and ask for a couple of listings for property types similar to yours.
To calculate a GRM, take the listed selling price and the annual gross rental income and divide one into the other, the equation looks like this:
GRM = Sales Price / Annual Gross Rents
8 = $640,000 /  $80,000
In this example, the GRM for a property with a listing price of $640,000 and $80,000 in gross rental income, is 8.
Then, simply average the respective gross rent multipliers together and you have a good indicator of the local market GRM for your property type.
As you can see, it is rather easy to determine the value of a commercial property using the Gross Rent Multiplier (GRM) approach to valuation. And since the major determinant of value for an income producing property is gross rents and comparable sales, the GRM is fairly accurate as well.

Commercial Mortgage Article published on September 4, 2006 by CommercialBanc.com

This article is protected under the copyright laws of the United States (title 17 U.S. Code).
Any unauthorized use is strictly prohibited. If you would like to reprint this article for use on a commercial website, please contact CommercialBanc for more information.

 
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