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Commercial Corner

By Frank Ramos

Investment Value and Performance

Gross Rent Multipliers

As I mentioned in my previous column on Investment Value and Performance, the processes used to determine investment value and to measure investment performance range from very simple ratios and rates to more complex cash flow models.

Last time I described the Sales Comparison Approach. Now, I'd like to discuss another method, the Gross Rent Multiplier.

by using the gross rents an investor anticipates the property will produce at the end of the 1stThis method calculates the investment value of a property year, multiplied by the Gross Rent Multiplier.

Calculating Investment Value

The Gross Rent Multiplier used is typically derived from comparable properties in the marketplace and possibly adjusted to the investor's specific requirements. The formula below illustrates how this is done to to determine investment value:

Gross Rent Multiplier x Forecasted First-Year Rental Income = Value

For example, if a property is forecasted to have $100,000 in first-year rental income and the buyer's gross rent multiplier requirement is 7, the investment value of the property is calculated as follows:

7 x $100,000 = $700,000

The $700,000 is the amount that this potential buyer would consider paying for this property.

Measuring Investment Performance

the Gross Rent Multiplier can also measure investment performance, given a price. Used in this way, the Gross Rent Multiplier indicates how many times the purchase price is multiplied by the first-year anticipated rental income:

Investment Value
---------------------- = Gross Rent Multiplier
Forecasted first-year
rental Income

If a property is offered for sale at $700,000 and the anticipated rental income for one year is $100,000, the potential buyer can meaure the investment performance in terms of a Gross Rent Multiplier as follows:

$700,000
------------ = 7
$100,000

The principal advantage of using a Gross Rent Multiplier is its simplicity. However, its simplicity limits is reliability since it does not consider vacancy and credit losses, operating expenses, financing and tax impact. In addition, it only looks at a one-year forecast.

In future columns I will discuss capitalizing the income stream of a property. This is known as Direct Capitalization and is another method of determing investment value and measuring investment performance.

ICE.com

Business Brokerage Business

By Frank Ramos

Buying and Selling Small Businesses

You might be suprised to learn that we can help you buy or sell a small business in addition to real estate. This is the business brokerage business and if you've every dreamed of owning your own business or are looking to sell your small business and retire, we'd love to help you.

Some Numbers

After taking out the hobby type of business as well as non-profits and government related businesses, there are about ten million real businesses. According to the American Business Information, over 80 percent of these businesses have 9 employees or less. 90 percent of these businesses have 19 employees or less. These 19 or less employee businesses represent the basic business brokerage market.

Almost all business brokerage transactions are for the sale of businesses under $3 million. In fact, most sales are for businesses under $500,000. Almost all surveys of business brokers show that the average selling price is less than $300,000. This does not include the inventory of businesses or the actual real estate, if it's owned by the business. This is the heart of general business brokerage.The sale of mid-sized companies may require a securities license because many of these companies are publicly held or being sold or acquired by publicly companies.

What is Being Bought and Sold

When you are buy or sell a small business, you are really buying or selling an income stream. Business brokers generally sell the assets of the business, or if the stock of the company is being transferred to the new owner, it is a privately held business being transferred to another party for the purpose of making a living and not for investment purposes.

Typical Buyer Traits

Some interesting traits of the typical buyer who buys a business from a business broker:

• 90 percent are first-time buyers
• Almost all of them are looking to replace a job.
• Most buyers will have $50,000 to $100,000 in funds to use as a down payment.
• Most buyers are looking at businesses priced at $100,000 to $250,000.
• Most buyers will not have sufficient funds to pay cash for a business.
• The #1 reason people go into business is "to have the satisfaction of being their own boss".

When you decide to go into business for yourself, what you are really buying is freedom!

Okay, that's a quick rundown of the business brokerage business. Please give me a call if you have a small business to sell or are interested in buying one and enjoying the satisfaction of being your own boss.