Do the Numbers Make Sense?

 Most investors want to know that 'the numbers make sense' for a purchase opportunity.  Ratios like GRM, NOI, or CAP can rapidly identify properties that warrant deeper consideration or investigation.   They describe the potential to earn money now and later from investment made today to acquire a given property.  So what are these indicators?  Let's look at the ratios in more detail...

Most investors want to know that 'the numbers make sense' for a purchase opportunity.  Calculations and ratios such as GRM, NOI, or CAP can rapidly identify properties that warrant deeper consideration or investigation.

GRM stands for Gross Rent Multiplier. 

The Gross Rent Multiplier is the ratio of the purchase price to annual gross income (before expenses) generated from rents. For example, the GRM for a property that generates $300,000 in rents each year and is offered for sale at $3.5M is $3,500,000 / $300,000 or approximately 11.7.

NOI stands for Net Operating Income. 

The Net Operating Income is the annual gross income LESS expenses. Expenses can include real estate taxes, maintenance, management, repairs, utilities, and more. For example, the NOI for a property that generates $300,000 in rents each year with $75,000 of annual expenses is $225,000.

CAP or Cap Rate stands for Capitalization Rate. 

The Capitalization Rate is the ratio of NOI to the purchase price. For example, the CAP for a property with $225,000 and offered for sale at $3.5M is approximately 6.4%. The following chart shows the valuation of a property for different CAPs.

Each investor pursues a unique investment strategy, demonstrates a particular threshold for risk, and desires a certain return on investment.  Even so, most investors rely on a core of indicators to rapidly assess the value of a particular  property as an investment as well as to compare that investment with other available opportunities.

With a firm grasp of the information contained in these ratios, the calculations can inform fundamental purchase questions – questions like “Does this opportunity match my investment strategy?” or “How much money (value) will this property generate over time?” or even “Are there ways to reduce costs or increase income?”