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boatrdr

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Reply with quote  #1 
I must be doing this wrong. I'm working on a duplex 1025. The form calculates the GRM for each duplex comp, each of which have sold recently and are rented. I average the 3 GRMs to get the subject GRM, and multiply that by the current rent for the subject to get the value of the subject via the income approach.

The form calculates the GRM by dividing the sales price by the rental amount. But that would mean the lower the rent amount, the higher the GRM, and thus a higher value via the income approach. And the higher the rent amount, the lower the GRM would be, resulting in a lower income value. This doesn't make sense. In reality, it should be the higher the rent, the more an income property would be worth. What am I missing?

hypothetical example: comp sold for $100,000 and rents for $1,000. GRM is $100,000/1000= 100. The subject rent is $1,000. So $1,000 x 100 = $100,000 income value.

OR the comp rents for $500. $100,000/$500 = 200 GRM. So subject rent $1,000 x 200 = $200,000 income value. 

So an income property is worth more when the rents are lower? Feel free to chastises my idiocy because I'm not getting this. Hopefully it's something simple I'm not seeing. 




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Mack

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Reply with quote  #2 
The value of the property probably won’t be the same or even similar , if it is renting $400 more a month. So, this will impact the grm for that property.

Generally, if it sold for more, it’s rent is higher.
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boatrdr

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Well, that was just a hypothetical. Change it to 3 comps that sold for 100k and are renting for 1050, 975, and 900 per month. The lower rents would result in a higher GRM, resulting in a higher income value. I'm strictly talking about the principle that the lower the rent, the higher the subject income value, which makes the income approach a completely contradictory method. How can an approach be valid if the lower the rent the higher the value?
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treskirkland

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Reply with quote  #4 
Quote:
Originally Posted by boatrdr
Well, that was just a hypothetical. Change it to 3 comps that sold for 100k and are renting for 1050, 975, and 900 per month. The lower rents would result in a higher GRM, resulting in a higher income value. I'm strictly talking about the principle that the lower the rent, the higher the subject income value, which makes the income approach a completely contradictory method. How can an approach be valid if the lower the rent the higher the value?



Well, in theory an investor would be willing to pay more for a property that is rented for $1,050 per month than $900 per month.   The problem is maybe the $900/month property has a tenant that has been renting it for the last 10 years, thus is paying a below market rent.   In order for it to be reliable you would need to make sure that the rents are all market rates.   
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Mack

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Reply with quote  #5 
GRM is the estimated number of months/years to get a return on the investment for the property. If you pay $100,000 and rent it for $1,000 per month, it will take you 100 months to get your money back. If you pay $125,000 for a property, the property rents for $1,000, it will take you 125 months to get your money back. If you pay $200,000, and it rents for $1,000, it will take you 200 months to get your money back. As noted, in theory, the investor will pay more for a property he/she can rent for more. So, there is a direct correlation between the price paid/value and the market rent for the property. The GRM is a way to compare this between different income properties. It doesn't work very well if the properties aren't really comparable.


So...take the first two examples above. If you have a GRM of 100 and 125. If your rent is $1000 per month like the examples and you use a GRM of 113, your value would be $113,000, which would be in line with the examples above.



So, a lower GRM could indicate a better deal on the property, if you are looking to invest.

The higher rent, typically carries a higher value, so the grm should correlate accordingly.
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RubberStamp

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Reply with quote  #6 
Quote:
Originally Posted by boatrdr


So an income property is worth more when the rents are lower? Feel free to chastises my idiocy because I'm not getting this. Hopefully it's something simple I'm not seeing. 




I'm not in a place to check my hypothesis but I believe you are incorrectly concluding that a higher GRM means a better deal..  when in fact it is just the GRM and the inverse is most likely true..  Being when the GRM is lower the investor will get more return on the dollar.



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Meatloaf

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Reply with quote  #7 
Like RS said.  YOu are thinking about it wrong.

The GRM is nothing more than a multiplier.  The lower the GRM, the more appealing it is for the investor.

When doing income properties... don't think so much about the realestate as the investor could care very little about it.  The investor is ultimately buying a tenant or a potential income stream.  GRM's are only reliable in high investment turnover areas where generally the income is fluffed to lure an inexperienced investor.  Lower GRM properties are generally located in areas where investors compete and higher GRM properties are generally located in predom owner occupied areas.  Generally the buyer profile for a lower GRM property includes mostly investors whereas the buyer profile for higher GRM properties includes mostly end users.  If you are in a high GRM market and the buyer profile is most likely not an investor then the income approach is meaningless anyway.

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