Photo Credit: aKc83
My previous boss was a swindler and a thief (a good one), but as time is never wasted, I learned two things from her. One: don’t surround yourself with people of lacking or immoral character; you have only limited time to enjoy your life, and your relationships are inextricably tied to your well being. Two: Don’t fire from the hip.
Regarding the first lesson: One of my favorite works of writing (whether poetry or philosophy) is William Blake’s The Marriage of Heaven and Hell. Within the work is a section known as The Proverbs of Hell. You’ve heard some of the proverbs before: no bird soars too high, if he soars with his own wings, the cut worm forgives the plow. The boss’s first lesson is a lesson of experience: (more…)
Photo Credit: Alex Benison
When I graduated college I was hired. Yeah, that’s a big deal now, and I hear it’s not getting much easier anyway. I met a leading producer in the commercial real estate industry with an interest in risk (pun intended – and if you understand that, you’re doing fine). I was interested in anything. It worked out well.
I was to create a decision-making, risk-analysis engine (from scratch) to identify the real cost of risk associated with commercial real estate as compared to, say, the S&P 500. What? That’s what I said. I worked with Perry (the analyst), we called the project: “The Stunt”. Why? Because we decided that’s a pretty cool name for a pretty lame project. And although formatting personalized engines to isolate very specific variables can be tedious at times (not to mention conversationally equivalent to lead [the soft, malleable poor metal]), they’re highly useful. For instance, did you know the relative cost of commercial real estate risk is well below the cost of any stock option, bond option, or fund? (more…)
What’s it take to be remembered forever? A good name? A well-worded turn of phrase? In the case of Henry Wadsworth Longfellow, probably both: There’s nothing in this world so sweet as love, And next to love the sweetest thing is hate! When it comes to the Gross Rent Multiplier, all financial students must learn: there is nothing sweeter to hate.
We’ll start with the benefits of the GRM: it’s easy. The Gross Rent Multiplier is simply the ratio of price to gross rents!
GRM is a quick estimation of investment value, often considered a “back of the napkin” calculation, however when dealing with multi-million dollar investments, it is absolutely essential to understand all risks involved, and GRM falls very short of a due diligence calculation. As investors/consultants/brokers/very-near-future-moguls we must reconsider the words of Walter Capital, and make every investment a smart investment. That’s not to say don’t take risks, in fact quite the opposite! Risk is our reward, but you must be smart about it.
Solely relying on Gross Rent Multiplier is like jumping out of a plane and hoping your backpack doubles as a parachute, and not the other way around.
The following example is GRM in practice:
If you have a 10 unit apartment building where all tenants pay $1,000 per month, and the market dictates the Gross Rent Multiplier should be around 10 times the gross rent, then the estimated value of the building is $1,200,000. See Below.
There was a time during the Industrial Revolution when a select group of astute individuals began realizing the opportunity of Commercial Real Estate. Running with the educated crowd was a man named Sir Walter Capital, who believed that a smart investment was a winning investment. In an effort to standardize his risk and comparable rewards, he conceived the ratio of income earned against investment cost, aptly named “Cap Rate”.
Cap Rate is the standard performance ratio in Commercial Real Estate, and can simply be referred to as your return on investment (ROI).
Okay… So if you clicked our Google link on Sir Walter Capital, a name we were sure would exist quite commonly throughout English history, and rather briefly admired an historic view of the Sir Walter Raleigh Hotel in North Carolina, you might now be wondering where the Wikipedia page on Walter actually went, or for those shrewd students of ours, just whether Walter mightn’t exist. Instead, focus on the fact that you’ve learned a very basic principle in Commercial Real Estate, invest smart by means of relativity (i.e. performance ratios), and for the time being we’ll let Sir Walter’s origins remain a mystery.
In case it emerges in everyday conversation, mainstream financial gurus interpret “Cap” as shorthand for Capitalization.
Again, it is best to consider a Cap Rate your return on investment. Although at its core a very simple concept, little has more importance in the Commercial Real Estate financial world.
So let’s try a very basic application:
As a new member of the Commercial Real Estate industry, you might find the analytics / financials overwhelming, so we’ve developed a freshman course, and for those long-time veterans, we promise not to tell as you wipe the rust away.
We’re here to make it easy… so sharpen your pencils, master the finances, talk the senior-year A-game we know you’re capable of, and please, no cell phones.
Let’s get started.