Investment Measures, Part I

Investment Measures, Part I
By: Nicholas A. Dunlap

This is the first part of a series on measuring potential real estate investments prior to acquisition and understanding how to qualify and quantify your investments.  For additional information on investing in commercial or multifamily real estate, please click here to purchase my book “The Four Benefits: Commercial Real Estate Investing & You.” 

Commercial real estate is valued on the quality and quantity of the income generated by the property as an asset.  As a result, there are a number of measures used to determine said value when it comes to investing.  Some of the more frequent measurements utilized are the Capitalization Rate (Cap Rate), Gross Rent Multiplier (GRM), Cash on Cash Rate of Return ($/$) and the Internal Rate of Return (IRR).  These investment measures can be based on the current or projected levels of income being generated by the asset.  There is frequent discussion over the preferred measure but this distinction can only be made when considering an investor’s specific goals or objectives for investing.

The Gross Rent Multiplier  
Some numbers, such as the GRM are absolute in that they reflect the actual gross income generated by the asset and the number of years it will take for the gross rental income generated by an asset to buy the asset at said value.  A GRM of 9 means that it will take 9 years for the property to gross enough rental income to buy the asset.  Simply put, as an investor you want to buy at the lowest GRM possible.