Net Operating Income (NOI)
Gross Income – Operating Expenses = NOI
Cap Rate
Divide the Net Operating Income (NOI) by the sales price, and voila!–there’s the cap rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return.
Example: Say the property has an NOI of $125,000, and the price is $1,125,000.
$125,000/ $1,125,000 = 11.1% cap rate
Maximum Purchase Price
NOI/Cap Rate = Maximum Purchase Price
Example: $125,000/11.71% = $1, 067,464
Gross Rent Multiplier (GRM)
Gross Rent Multiplier is the ratio of the price of a real estate investment to its monthly rental income before expenses such as property taxes, insurance, and even utilities for vacation rental properties. Other expenses could include the cost of hiring a property management company.
To sum it up, the Gross Rent Multiplier is the number of months the property would take to pay for itself in gross received rent. For the investor, lower is better. A higher GRM (i.e., over 120) is a poorer opportunity, whereas a lower one (i.e., under 80) is better.
Example: $200,000 Sale Price / $2,000 gross monthly rents = 100
For the full article, with formulas, visit: CRE Online
