Figuring out cash flow from Gross rent multiple question
Putting aside the fact that GRM gives very little data, I've seen that a property will only cash flow if it has GRM under 8. Can someone please explain the math to me?
Thanks
[{"id": "j24x9uy", "text": "It's a pretty terrible indicator. \n\nTo answer the question - it can be used on a regional level where many assumptions can be made regarding similarities between properties in rent, property taxes, utilities, etc. Therefore you can say, a property with eight times gross rent should be able to throw off cash flow based upon a \"typical\" expense ratio. \n\nNot sure if that makes sense.", "replies": [], "depth": 1}, {"id": "j258ab6", "text": "I don't think you can generalize that GRM &lt;8 for a property to be cash flow positive.\n\nCompared to a NNN lease where the risk (increased expenses) is 100% allocated to the tenant, in a  Gross lease the risk is allocated between LL and tenant(s). \n\nI've had few properties with gross lease and always tried to \"convert\" them to a NNN lease by breaking down the gross revenue in Rent + Additional Recovery Expenses  (Property taxes, insurance, capital, other expenses). This will give you a better indication about the \"value\" of the gross lease.", "replies": [], "depth": 1}, {"id": "j25qpud", "text": "A GRM is an income approach to value.  If similar properties are selling at 10 times the annual gross rents then you can assume no one will sell to you for less than 10 times gross.  \n\nThere is no way to determine \"cash flow\" from this metric.  The expenses could be 30% or even 60% of gross rents,  The GRM will get you to a market value but any other calculations would be independent calculations.", "replies": [], "depth": 1}, {"id": "j25w2ys", "text": "Why are you using GRM?\u2026.", "replies": [], "depth": 1}, {"id": "j25whfl", "text": "GRM can\u2019t be used to determine cash flow as that is dependent upon expenses and loan. But GRM is a good napkin analysis, back when multi family interest rates were 4-5%. My napkin math GRM for break even cash-flow with 25% cash down and assuming 50% expenses/vacancy was roughly a 9.5 GRM.", "replies": [{"id": "j267saq", "text": "Can you please elaborate on this?", "replies": [{"id": "j26f2vf", "text": "This is ballpark three minute math. 950k purchase, income $100k is 9.5 GRM. 50% expenses leaves $50K noi. loan is $713 K at 5%. loan payments 3800 a month times 12 = $46k. So roughly break even, even though napkin math shows $4k annual cash flow. CAP is 50k/950k = 5.3%. Back in 2010-2015, you could find a deal like this or even better in grade C areas in California. Now maybe a 10 GRM, but interest rate is 7%, so most California deals don\u2019t make any sense.", "replies": [{"id": "j27ncy2", "text": "Thanks for the explanation. The fact that noi is based just on rent and not other income is just the nature of this being a BOE analysis, correct?", "replies": [{"id": "j2933yg", "text": "To get good at RE analysis - you have to realize sellers/listings agents lie (expenses understated and future income overstated) and therefore have to have several of your own metrics. GRM, cap rate, cost per sf, etc all plugged into your own spreadsheets with YOUR estimates not just taking sellers overly optimistic projections. Then you can make a better decision to buy or not.", "replies": [], "depth": 5}, {"id": "j2ep9h4", "text": "NOI includes all income to the property and that includes \"other\" income.  Other income would include parking, laundry, etc.", "replies": [{"id": "j2fws5r", "text": "I understand that but GRM is based only on rent, gross rent multiple.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]