Greetings from the handmade wig capital of the world…..Cedar Crest, NM!

The Christmas season is over and I have added to my layer of fat in preparation for the lean times ahead of me (us). Yes….you may think I unintentionally overate like the rest of the U.S. population….but my overeating is intentional….because I have been drinking the “Kool-aide” that the worst financial disaster we will ever see in our lifetime is upon us.

The reality is this is, the most opportunistic time in our lifetime is upon us…..r u ready? R u educated? Do you have a mentor? Have you made a commitment to take advantage of the opportunities before us? Are you tired of hearing of all the “doomsday” crap? Yeah….me too.

At the bottom of the post you will see a list of the latest news from the Blog-O-Sphere.  Check out the Paper Economy blog.  It is and has been one of my daily reads for a while now….did someone say “doom and gloom”?

Today, Emily Cressey has jotted down a few notes about GRM (Gross Rent Multiplier). Such as the Cap Rate (Capitalization Rate), the GRM is a widely misunderstood and poorly used

Emily Cressey speaking on Commercial Real Estate

asset analysis measurement. Thankfully, Emily not only defines but simplifies the use of GRM.

Gross Rent Multiplier (GRM)

The Gross Rent Multiplier (GRM) is a method of valuing commercial real estate (or other income property) that focuses only on INCOME. The GRM does not take into account any of the costs of operating the property, all it looks at is income. Refining further, it doesn’t even look at all the income, like laundry or vending income, it just looks at RENTAL income.

Here’s how it works:

GRM is a simple number (multiplier)  like 8 or 20. You look at a building’s gross annual rental income and multiply it by the GRM figure to get the “value” or “price of the property.

Ready for an example?

A 5-unit apartment building where each unit rents for $1,000 has a annual gross income of (5 units x $1000/month x 12 months = $60,000).

So the Gross Rental Income is $60,000 (Remember, in commercial property evaluation, we typically look at ANNUAL income and expense figures, not monthly figures.)

We take the asking price for the property and divide by the Gross Rent to find the GRM.

If they were asking $1 Million for the property, the GRM would be 16.67.

Price / Gross Rental Income = GRM

$1,000,000 / $60,000 = 16.67

Likewise, we can use a “goal” GRM to determine the most we’d be willing to pay for a property.

If we are looking for properties with a GRM of 8 or lower, we’d do this:

Gross Rental Income x GRM = Maximum Offer Price

$60,000 x 8 = $480,000

As you can see in this example, the size of the GRM drastically affects the perceived value of a property.

Talk to real estate agents to find out what the range of GRM’s is in your area. I would say 8 – 15 is a pretty reasonable range. Keep it on the lower end if you’re looking for properties that cash flow.

Here in Seattle, we often see GRM’s above 15, but these are for properties that don’t cash flow until you put about 40% down to buy them.

Properties often sell above that range if they are being promoted as “change of use” properties. For example, we had a wave of condo conversions in the past few years and developers were buying apartment buildings with GRM’s of 20 – more than any investor wanted to pay for the apartment building – because they were going to CHANGE THE USE from apartments into condos, and they could afford to pay more for the building and location because they had a different exit strategy.

Investors who look for property on the basis of GRM tend to be either real novices, or old hands who are very familiar with the costs of operating buildings in the area.

Since GRM’s give such a high-level look at the property (just evaluating a portion of the income, relative to price), scanning GRM’s can tell you if some properties are out of line for the market.

For example, if the rents in a building are especially low, the GRM would be higher than the norm for the area. That might represent a buying opportunity for a real estate investor who wanted to come in and raise the rents and thereby increase the value of the building. A very low GRM would indicate a property that is bringing in a lot of rent relative to its value. This might be an indicator that it has priced low for other reasons, for example, it may be in need of capital improvements or have other issues that the new owner will need to spend some time and money to resolve.

Personally, I don’t like to weigh the GRM too heavily because I feel, as a price indicator, it only tells a small portion of the story about a property.

However, it is quick and easy to calculate and as a rough-and-dirty guide, it can have some value.

Commercial Real Estate News from the Blog-O-Sphere:

Heading into the climax of the year…..nothing surprises me anymore.  Another bank closure….commercial real estate developers want a piece of the bailout action….Santa Clause gets laid off.  No surprises here.  But what is a surprise is Detroit Lions have yet to win a game.  And….Sam Bradford and Oklahoma Sooners are headed to the BCS Championship.  Who said College Football is not POLITICAL…how else did Oklahoma end up there?

So…in other not surprising news….Circuit City leads the way into the depths of retail hell.  Check out this article HERE where Circuit City takes the position of the drowning rat…while others stand in line and watch before it is their turn. Read this snippet:

“But the issue is much bigger than Circuit City’s leases. Many retailers are suffering sales declines, closing stores and slowing the pace of expansion. That’s creating a lot of excess space along with a shortage of potential replacements. While some segments of the retail industry are still growing—most notably discounters and grocers—there isn’t enough overall demand to absorb the space that’s coming to the market right now; especially in the mid-size big boxes Circuit City inhabits, notes Andy Graiser, co-president of DJM Realty, a Melville, N.Y.-based real estate disposition and restructuring firm that is handling Circuit City’s portfolio. As a result, failed auctions of excess retail space could become a common occurrence next year, according to Graiser.”

Also….as things get worse….watch the CAP rates creep up.  Check out the CAP rate chart HERE.   How high do you think they will go?  Are you buying or running?  The opportunities are getting better and better if you know what you are doing.  What are you going to do?

More Commercial Real Estate News from the Blog-O-Sphere…..

Until next time…..rob

make the pain go away!

Greetings from the commercial real estate metropolis of Cedar Crest, NM!

To be honest, I am not a fan of “Christmas” per se.  I do love the true meaning of what Christmas is all about….but I sure have a hard time enjoying myself with all the ”stuff” that goes along with it.    The crowds….the traffic….the lines….the shopping….the “events.”  I for once….would like to have nothing to do over the Christmas holiday other than hangout with family and friends and watch college football.  I do not even mind the traveling…it is just all the “stuff” that stresses me.  I guess it does not help that my laptop died yesterday.  Dadgum you Sony Vaio!

This last weekend I had the priviledge to go to Juarez Mexico and play Santa with friends of mine from Maui Mastermind.  Maui Mastermind, via Estrellas Para Ninos, adopeted a couple of orphanages in Juarez.  It was cool to hang out with the kids, play Santa, and get grounded on what is really important.  Thanks to Steve, Andrea, Christine, Austin, and McKenna for doing most of the work and letting me tag along!

Now…..Commercial Real Estate News and Articles.  One day…one of these days…there will be some good news….but not today.   The headlines for today is all about a commercial real estate bailout…..wow!

Until next time…..rob

Greetings from Cedar Crest, NM….still cold but no snow….what a shame.

Roubini: Worst yet to come

CNN Your Money: Talks of Great Depression Coming

Until next time…..rob

Other Post from around the web:

Mish’s Global Economic Trend Analysis: Prepare For Depression … – Deflation has already set in and it’s now realistic to start talking about another “D” word, this one being depression. Before we can use a word, we must define it. For the sake of argument, let’s define depression as unemployment of …

CNN on post-Great Depression recessions suffered by US (Thomas … – CNN on post-Great Depression recessions suffered by US. Interesting bit: Average US recession (11 since 1930s) lasts less than a year (or 6-12 months) except for two (early 1970s and early 1980s) that were global ones, in addition. …

America’s Second Great Depression Has Started :: The Market Oracle … – America’s Second Great Depression Has Started :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website.

TruthNews.us » Blog Archive » Corporate Debt Protection Costs … – The cost of protecting corporate debt from default jumped to a record in Europe and neared a high in the U.S. amid concern that the global recession will sink into a depression. Credit-default swaps on a benchmark index tied to below- …

Cramer: Depression Comparisons are ‘Scare Tactics’ | NewsBusters.org – Recent contractions in gross domestic product are also far from the huge drops seen during the Great Depression. And current stock market volatility doesn’t compare to the 90 percent decline during the Depression. …

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Greetings from the metropolis of Cedar Crest, NM….

Hey….how about them Sooners…..dadgumit!  My beloved Red Raiders not only lost….but got schooled.  Wow…I was sick to my stomach.  BUT….I can easily find something that makes me more sick….i.e.  Commercial Real Estate Outlook….if I was a seller….in which some cases I am, the acid in my stomach is thick!.  But….as a buyer…..whoa…the opportunities are getting hotter….and the outlook is HUGE!

There in no good news with regards to what is happening in the grand scheme of things (the overall economy).  I read an article today that commercial investors are “running to the hills” because financing is gone and the “sky is falling” ……..but if you follow my blog every once-in-a-while….we knew this was coming and we are licking our chops….right?  If you followed this blog a couple of years ago…you knew to “sell high and buy low”….well with all the cash you got from selling high…now the time is coming (if not already here… to “buy low.”

Well….here is some real estate news from the blog-o-sphere…..

U.S. bails out Citi with $20 billion capital, guarantees (Reuters …

… such as credit cards and commercial real estate. The rescue magnifies the US government’s burden following bailouts of insurer American International Group Inc, Bear Stearns and mortgage finance giants Fannie Mae and Freddie Mac.

Chain of Blame Book Review – BusinessWeek

… bloggers finished #1 in a ranking of the world’s top 100 “most powerful property people” by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News. …

Fear Gripping Commercial Real Estate—But Question Is Why? – Realty …

I realize commercial real estate is in for a ride of its own, given job losses and recession, but commercial loans are neither designed like residential nor are they anywhere close to collapsing the way residential loans did and still …

Homes Sales, New Starts Fall – Real Estate Investing

October wasn’t a good month overall for real estate, except for the buyers who snagged thousands of great deals thanks to the sliding house values we’ve seen this past year. According to the National Association of Realtors and as …

Trammell Crow will be missed

These are indeed tough times for the Oklahoma commercial real estate markets, but the good news is that commercial real estate is cyclical and whatever goes down must come back up at some point in time. Tags: Commercial Real Estate …

Crack of Doom: Enron’s Revenge

Chicago Real Estate News Commercial Real Estate Appraiser – Appraisal Blog Dr. Housing Bubble Dreams & Realty Halloween Real Estate Ideas Homewerx Home Inspection Blog Housing Doom Housing PANIC Housing Wire Investment Real Estate Blog …

Until next time…..rob