Case Cap

Maximum rate and GRM (gross rent multiplier) are popular property investment measures regularly used by real estate agents and individual investors seeking to determine if a rental property is or not, with a correct price and might be a good investment opportunity.

Both measures provide only an estimate of the value of rental property, and alone do not give a true picture of the profitability of a property. But they can provide a quick look first look the ability of a property to pay their own way and because they are easy to calculate, are a popular way to determine if a property is in line with similar other recently sold or listed properties for rent.

As a result, the CAP rate and GRM are used by sellers to set a sale price of properties rent, and by buyers trying to determine the price offered.

So which is better? At day's end, the method that best estimates the value of a rental property, the best measures of financial performance, ownership, and more help in an investment decision?

In this article we to consider both, then decide.

Capitalization Rate

Cap which measures the ratio of net operating income from the property and its price expressing the percentage of net operating income of a property is its value (or sales price), and as a general rule, if a building has the ability to pay its own way.

This is the idea. Net operating income (NOI) is all revenue after operating costs which represents the amount of money generated for the property that is available to pay the mortgage (lenders look closely at why it's time to take a loan). In this case, the cap rate shows what percentage of the available funds are selling prices.

The formula is simple. To estimate the value of a rental property, property NOI multiplied by any capitalization rate as appropriate. For example, if similar properties are sold at a 6.0% CAP rate and consider that adequate revenues are increasing Net operating the property in question is 6.0 to arrive at its market value.

The disadvantage of this method is that it is sometimes difficult to confirm the actual operating costs of goods sold and therefore difficult to determine the real (not just published) rate was sold.

There is no such thing as a kind universal maximum. Depends on the individual market areas, which could make a car look of property income as a robbery in a city or state in 6%, I could not get a second look in another.

Gross Rent Multiplier

The GRM method (expressed as a number) measures the relationship between a rental property scheduled gross income (GSI) and its price.

Its advantage is that it is easy to calculate. Do not even need a computer to calculate, because you can probably do it in his head. Divide the sales price of a property by GSI to reach a gross income multiplier, and multiply GSI of a property for any GRM they deem appropriate to arrive at an estimate of property value.

For example, if similar income properties recently sold around 5.0 GRM and is intended to reach an estimated market value of a property of generating a projected gross income of $ 80,000, you would multiply that amount by 5.0 for determining their value.

The disadvantage of this method is that it does not take into account the levels of occupancy and operating costs, both of which are indicators important on the overall performance of a property and assets necessary for making good investment decisions.

As with capitalization rates, there is no universally correct for GRM number because it is market driven. I would be surprised, however, see a lower number than 4.0 or greater than 12.0 and if so, strongly recommend that you dig into the numbers that produce those results. Okay, so the method is the best way to determine the value of a rental property?

Despite gross rent multiplier is undoubtedly the easiest method to calculate, and can serve as a useful precursor for a property analysis serious, most analysts agree that the most reliable way to determine the value of rental property is the cap rate method.

Naturally, you should not rely on the capitalization rate just to provide a true picture of the profitability of a real property or making a real investment decision without properly computing all the numbers, rates of return, and cash flow scenarios for himself.

Remember that numbers can be manipulated. When was told how great is to buy a rental property is based on its maximum rate, be sure to rebuild their own raw data to make sure everything is revealed and there nothing hidden before they actively pursue more real estate investment.

About the Author:

James Kobzeff is the developer of ProAPOD – leading real estate investment software since 2000. It’s fast, easy, and concise. Create rental property cash flow, rate of return, and profitability analysis presentations in minutes! Cap rates and GRM are automatically computed. Learn more at => http://www.proapod.com

Article Source: ArticlesBase.com – Cap Rate or GRM: Which Best Estimates Rental Property Value?

Case Cap

Case Cap