Commercial Corner
By Frank Ramos
Gross Rent Multipliers
When we talk about commercial properties we are talking any property not used as a primary residence that is held for income and/or capital appreciation purposes. This can range from a small townhome used as a rental property to large shopping centers, office buildings and hotels.
In the mortgage financing process, most lenders require a certified appraiser to determine the market value of a property. Investors also need to determine what a propery is worth for themselves. This is known as Investment Value.
The investor's goal when determining the investment value of a property may be to decide what to pay for a property to achieve a certain set of performance objectives.
Investment Performance is when an investor measures how a property might perform against certain objectives if purchased at a given price.
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.
For now, let's focus on one of the simplest methods, the Sales Comparison approach.
Investors may use the same sales comparison approach that appraisers use to decide what to pay for a property (investment value), given the price per square foot:
Price per square foot x Total square fee of building = Investment Value
Investors can also use the sales comparison approach to determine the per-unit cost of a building at a given purchase price and compare that to the per-unit cost of recently sold comparable properties:
Purchase price
---------------------------- = Price per square foot
Total square feet of building
An advantage of using the Sales Comparison approach is that an investor can compare the per square-foot costs of an existing property to the current land and construction costs. However, this approach does not consider the properties income. Also, some properties might not have a sufficient number of comparable properties.
In future editions of this newsletter I will cover Gross Rent Multipliers, Cash-on-Cash Ratios, Capitalization Rates.
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