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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. |
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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. |
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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
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| 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. |
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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 |
| 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. |
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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. |
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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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