Home Buying in 95129>Question Details

Jason, Home Buyer in San Jose, CA

I am considering a 4 unit complex. Our real estate agent is using a gross rent multiplier in order to value the property that we are considering.

Asked by Jason, San Jose, CA Sun Dec 16, 2012

A few questions:
1) Is GRM appropriate for valuing this property or should she be giving us additional information? I read elsewhere that cap rate is an important measure that should be considered as well? Should our agent have told us this?
2) Does a GRM of 14 sound pretty reasonable for west san jose?

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Answers

9
Hi,
look at the property's current and projected cash-flow, NOI, GRM, CAP Rate, IRR and compare them to those of comparable properties to guesstimate its value and your purchase offer

good luck!
BUYER CASH REBATE 50%-60% / SELLER DISCOUNT 50%

Flavio Tejada, MBA-Finance, Realtor, Broker/Owner
(415) 305-2958
Web Reference: http://americarealtyonline.com/
1 vote Thank Flag Link Mon Dec 17, 2012
GRM is a very basic rule of thumb. Cap rate is better. Although both do not take into account financing, down payment, appreciation, tax impact and more.
True analysis is done with the IRR (Internal Rate of Return) over the holding period.

BTW - GRM can be skewed dramatically if the current rents are below, at or above market. Also watch out for San Jose rent control - currently 8% increases per year - but if your rents are significantly below market - you could take years to catch up. So a 14 GRM could be great or could be very expensive. More info needed.
1 vote Thank Flag Link Mon Dec 17, 2012
Mario Pinedo,…, Real Estate Pro in Beverly Hills, CA
MVP'08
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Hi Jason,

There are a lot of really great answers for you to consider. If this is your first time owning investment property, what the property is now is one thing. What the property can be after you buy is another.

As others have mentioned, property condition is a huge factor. Have the units been upgraded over the past few years? This can dictate monthly rent potential. Are you going to manage the property yourself or have someone else do it? What's that cost? Is there deferred maintenance? What things can you do to make the property function more effectively? What rents can the neighborhood support? What's your down payment and what return on investment are you looking for to make owning this property (or any property) worth while?

Tenant issues are another topic and I'm sure I missed a few questions you should ask yourself.
Make sure you educate yourself. You're in a different ballgame once you start talking about investment property.

I wish you luck.

David Sciplin
Web Reference: http://www.davidsciplin.com
1 vote Thank Flag Link Mon Dec 17, 2012
Jason:

RealData.com has some handy investment calculators for little money. Yes CAP rate and Return on Investment, Cash Flow, and "Cash on Cash" are all good tools. Nothing is as important as inspecting the building to determine what needs to be fixed up. Also, go over the expenses for the building, which should be available from the seller. Look at what he is claiming v the condition of the building to get an idea if deferred maintenance or cooked books are issues. Gross Rent Multipliers averaged around 22 before the Great Recession in many parts of San Jose.

Also, if you are planning to live in it, do you like it? If you are planning to rent it out, would you like to rent it? Does the building present good value to prospective tenants? Are the rents you will need to charge to meet your investment goals a little under market for the area? Are there neighborhood factors that increase its value such as being in an excellent school attendance zone? Are you comfortable with the mix of tenants in the neighborhood? Will the building attract the tenants with characteristics you want to attract? The answers to these questions are important and may actually get you to "Yes or I'll pass on this one." analysis quicker than all the other tools.

Mitchell Pearce
408-639-0211
mitchell@handsonrealtor.com
1 vote Thank Flag Link Mon Dec 17, 2012
if your agent is only using GRM for valuation this is a very limited picture in my view. I cannot comment on whether a GRM of 14 for San Jose is good or not because we don't work there, but you should be looking at comps, cap rate and ROI for sure before making a purchase.
1 vote Thank Flag Link Mon Dec 17, 2012
The value is going to be determined by a number of factors – including the prices of comparable building close by, condition of the property, current rents and so on. GRM is only one tool to use – CAP rate and ROI are also important.

Here is website that may be helpful:
http://rhol.com/members/csu/valuing/Lesson6.asp
1 vote Thank Flag Link Mon Dec 17, 2012
I would suggest that she run a cash flow model for you.

As Charles stated, there are too many variables to use just one method to determine if this is the investment for you. Your expectation also needs to be taken into consideration.

Have an amazing day!
Web Reference: http://www.terrivellios.com
1 vote Thank Flag Link Mon Dec 17, 2012
Thank you for your question Jason:

I am a former Real Estate Appraiser and expert witness in both court and arbitration cases for the valuation of both residential and commercial property.

I do not consider a gross rent multiplier alone to be a sufficient method to value Real Estate.

The gross rent multiplier is a method that is prone to a large amount of error. There are other methods that are more accurate and less prone to error than the gross rent multiplier method.

The gross rent multiplier method is quick and easy. That is the reason that many people like the gross rent multiplier method, however because the gross rent multiplier method often introduces a significant amount of error into a valuation, in my opinion the gross rent multiplier method should never be used as the only method to determine the fair market value of a property but only as an additional source of support for the determination of value, or as an indicator that you should check your work again if the value that you have determined by the use of the gross rent multiplier method is significantly different from the value that you have determined by other more accurate and more reliable methods.

With respect to whether or not a gross rent multiplier of 14 is reasonable for a property in West San Jose, I would need a lot more information for the specific property that you have in mind. It is possible that a gross rent multiplier of 14 might be reasonable for a property in West San Jose, but without a lot more information about the specific property that you have in mind, it is impossible to determine whether a gross rent multiplier of 14 is the correct number for the property that you have in mind.

One of the problems with the gross rent multiplier method is that small errors in making the determination of the gross rent multiplier are magnified into very large errors in the determination of value for the property.

For more information, you may call me at my cell phone: (408)509-6218 or send me an email at my email address: charlesbutterfieldbkr@yahoo.com

Thank you,
Charles Butterfield MBA
Real Estate Broker/REALTOR
American Realty
Cell Phone: (408)509-6218
Fax: (408)269-3597
Email Address: charlesbutterfieldbkr@yahoo.com
DRE#00901872
.
1 vote Thank Flag Link Sun Dec 16, 2012
Dear Jason,

The formula's for evaluation of a commercial investment, is what you actually need. A Commercial Broker will have access to this and it's actually called, IRR. This is the final figure (percentage) you will get after looking at all your expenses and income from an investment.
This will help you compare this investment, to what you would get putting your money elsewhere...but not everyone is trained in this. You need a good Commercial Broker or one with a C.C.I.M designation.
0 votes Thank Flag Link Mon Jul 1, 2013
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