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Sale Of Commercial Property

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Now a Rubber Chicken is pretty useless ... except as a practical Joke. Let's take a look at the most useless number in Commercial Real Estate.

The Gross Red Multiplier (GRM) is a number you will see on every Broker's pro forma. And it is touted as a measurement of the "Property's Value". If anyone out there really sets a property's value based on GRM ... I have to wonder what they are smokin'. I'm not really sure what a Gross Rent Multiplier measures, but it certainly is NOT the Value of the Property.

GRM is calculated by dividing the Property's sales price or value by the Gross Potential Income.

Example:

A $1M property with a $100K annual Gross Potential Income. This property has a GRM of 10.

Price (Value) / Gross Potential Income = GRM

$1M / $100K = 10

The GRM number can be thought of as similar to a Price Earnings Ratio for a stock. The Gross Rent Multiplier is the amount of time it would take you to pay for the property if you were actually collecting the Gross Potential Income and putting it towards the property purchase. For our example property: If you were able to collect that hundred thousand dollars a year and you magically devoted all of it to paying for the property ... it would take 10 years for you to complete your purchase.

Beware of the Gross Rent Multiplier.

It can help you compare price between different properties, however, it is absolutely and totally useless as an estimate of value to a returns focused investor. You are focused on the Return on your Investment. You are focused on the Bottom Line. And the GRM is about as much help in understanding your ROI as a Rubber Chicken.

Since the Gross Rent Multiplier only deals with Gross Potential Income, it is flawed for two main reasons.

1) We're talking only about "Potential Income" based on the Broker's most optimistic projections of attainable rents. The basic number has no basis in reality - especially if you are looking for a property with upside. Think about it for a second ... if the Seller could get these rents for this property they wouldn't be selling!

2) Gross income starts at the top of the financial statement. For any particular property there is absolutely no relationship between the Gross Income, and the Net Operating Income (NOI) down on the bottom line. You have to know the Real Income and the Real Expenses to understand the actual NOI this property can produce.

It is only when you understand the Net Operating Income that you can calculate your potential Return on Investment.

Our advice...

Whenever you see the term Gross Rent Multiplier ... just ignore it.

And if a promising property shows up ... ask for the rent rolls and the financials and figure out the Net Operating Income as best you can. With the bottom line Net Operating Income and potential price in hand, you will be able to calculate your Return on Investment.

With this solid, fact based set of numbers you can make an offer based in reality. Doesn't mean the Seller will accept it... and at least you start the negotiations with your feet on the ground.

Sale Of Commercial Property

Some of the best cities for commercial property truly do belong in states that are dependent upon the shipping industry. Cities like Bellevue and Seattle, Washington are two of the best cities to do business in. This is why companies like Costco and Amazon have maintained their main headquarters in Washington state. Businessmen like Howard Schultz love all the movers and shakers in Seattle as they grab their coffee on the go. People can spend more on coffee and items that they want their because there is no personal income tax in Washington State as well.

Obviously the best places for commercial properties would be cities with a lot of population growth and the majority of that growth is coming from people with plenty of disposable income. Cities like Alexandria, Arlington and Fairfax in northern Virginia continue to expand. A lot of these folks have come down from Maryland to work for a technology, pharmaceutical or government firm around Washington D.C. and have plenty of money to spend. If someone has the resources to galvanize a venture down there, opening a deli or some quick sandwich shop where you can get a lot of these commuters as they go to work could be a very lucrative idea.

Setting up a venture such as a retirement home in a states like Texas or Florida may not be a bad move. You have a wide array of candidates to pick from in the workforces of these two states as well. Another advantage to setting up these types of businesses is that Florida and Texas do not tax retirement income. This obviously already draws a lot of seniors to cities like Boca Raton, Palm Beach or Galveston and Forth Worth respectively.

Cities like Tucson and Phoenix will continue to thrive because of their passionate sports fan base. Plenty of people love to shop or eat before they go to the game to root for their Arizona Wildcats and beloved Phoenix Suns. It all comes down to the fact that commercial property taxes have to remain in a growth minded assessor and mayor's hands given that commercial property taxes are assessed locally.

One of the best cities in the state of Alabama to do business in is the city of Montgomery. A tax package was recently passed in the city that allowed businesses like Wal-Mart to come in to the city and create plenty of local commerce around it. If you can set up shop near a Wal-Mart and offer a service that they are sub par in, the benefits can be tremendous. The formula is simple if you keep property taxes low in cities businesses will come there and people will have money to purchase items with. Cities like Montgomery are dependent upon the sales tax and tourism like the city zoo for most of their revenue in any event.

Kids love the zoo so it wouldn't be a bad idea to set up a toy store or some kind of food and beverage stand near by if you can get the permit. That is what is most important when it comes to commercial property. Set up shop as close to people as you can and offer an affordable product; the rest should take care of itself.

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About Author

Both Monte Lee-wen & D Walker are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Monte Lee-wen has sinced written about articles on various topics from Finances, Real Estate and Foreclosure Help. Learn the Insider Secrets of Commercial Property Investment from Monte Lee-Wen who has personally purchased over $150M in Commercial Real Estate. CLICK THIS LINK NOW to start your. Monte Lee-wen's top article generates over 49500 views. to your Favourites.

D Walker has sinced written about articles on various topics from Office Space, Legal Matters and Real Estate. Dave Walker - Operations Manager of Office Space Local. He has over 20 years experience in the US office space and marketplace. Office Space Loca. D Walker's top article generates over 201000 views. to your Favourites.

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