馃攳
Real Estate Math Video #15 - Gross Rent Multiplier (GRM) | Real Estate Exam Prep Videos - YouTube
Channel: The Real Estate Classroom
[0]
hey everyone my name is paul pacheski
[1]
and welcome to the real estate classroom
[3]
youtube channel real quick before we get
[5]
started please do me a favor give this
[6]
video a thumbs up hit that red subscribe
[8]
button click on the notification bell
[10]
comments and questions down below in the
[12]
comment section love love love love
[14]
love comments and questions today's
[17]
video
[18]
video one of two we're going to discuss
[20]
the income approach to valuation
[22]
it's a type of appraisal there are two
[25]
methods
[26]
of determining value based on income
[28]
it's using the gross
[30]
rent multiplier and the capitalization
[33]
method but in this video it's all about
[36]
the gross rent multiplier so
[38]
let's check it out in this video
[45]
[Music]
[47]
okay real quick before we get into the
[48]
gross rent multiplier i know this is
[51]
killing a dead horse but there are three
[52]
approaches to value
[54]
you have to know these for your real
[55]
estate license exam
[58]
there's the sales comparison approach
[60]
sometimes called the market data
[61]
approach where we
[62]
we determine value by comparing
[65]
properties that have recently sold that
[67]
are similar to our subject property
[70]
if you have not watched that video
[71]
please put this video on pause
[74]
and go back and watch that one because
[76]
it will help you
[77]
understand the gross rent multiplier
[81]
formula the link is right up here in the
[84]
upper right hand corner of your screen
[86]
approach to value number two is called
[88]
the cost approach this
[90]
is for valuing those unique properties
[92]
such as
[93]
municipal buildings and and churches and
[96]
whatnot where we consider
[98]
the property's cost to rebuild and then
[101]
there's the income approach
[103]
that's what we're doing today there are
[104]
two videos today's video and tomorrow's
[106]
video
[107]
uh in today's video we're going to
[109]
discuss the grant
[110]
the gross rent multiplier and then the
[114]
capitalization method the two methods of
[118]
using the income approach to value
[122]
now as i said gross rent multiplier is
[124]
the first formula the capitalization
[127]
method is the second formula
[129]
but i do want you to notice there is a
[131]
distinction between the two formulas
[133]
that you
[134]
absolutely have to remember the gross
[137]
rent multiplier is based on monthly rent
[141]
first of all and it's gross income
[144]
when we talk about in the next video the
[146]
capitalization
[148]
method that formula requires
[151]
the net operating income there's a big
[154]
difference between gross income
[156]
and net income and in fact it's
[159]
interesting because the gross rent
[160]
multiplier
[161]
is the gross monthly income and the
[164]
capitalization method uses the net
[167]
annual
[168]
net operating income so you have to know
[171]
those two
[172]
differences or otherwise any question
[174]
that you get on your exam
[176]
you're totally gonna screw up but don't
[178]
worry we're gonna cover all of that in
[180]
both these videos
[182]
so let's talk about the gross rent
[185]
multiplier now on your screen i have
[187]
gross
[188]
monthly rent multiplier the reason i did
[190]
that is because
[191]
depending on which test you're taking
[193]
from which provider
[195]
uh is it psi is it amp
[198]
they call it different things so in some
[201]
areas of the country they call it the
[202]
gross monthly rent multiplier
[204]
and in other parts it's called the just
[206]
the gross rent multiplier so you have to
[209]
know they're one and the same
[210]
but the formula is the gross income that
[212]
our subject property the property that
[215]
we're trying to determine the value on
[218]
it takes into consideration the subject
[220]
property's gross rent
[222]
income per month and then we multiply it
[225]
by
[225]
a factor a number called the gross rate
[228]
multiplier
[229]
we get the gross rep multiplier or what
[232]
we call the grm
[234]
from comparables all right and then that
[237]
determines
[238]
the subject property's value based on
[241]
the income
[242]
that it produces and it's a three-step
[245]
formula and when we're doing the
[246]
calculations there's step one step two
[248]
and step three
[249]
and that's how we're going to do it here
[251]
in this video so let's take a look at
[254]
this step number one we need to
[256]
calculate the gross
[258]
monthly income of our subject property
[260]
remember the subject property is the
[262]
property
[263]
that we don't know the value on and
[264]
we're trying to find out what it is
[266]
using income so let's say it's a triplex
[269]
that means there's three units that's
[271]
being rented out
[272]
each unit is renting out for five
[274]
hundred dollars per month
[276]
that means that it produces this triplex
[279]
produces growth a fifty one thousand
[282]
five hundred dollars in
[283]
gross income or gross rents
[286]
all right so that is step number one
[288]
we've calculated what the subject
[290]
property's gross
[291]
monthly income is step number two
[295]
is calculating the gross rent multiplier
[298]
now how do we get the grm
[300]
well we're going to kind of do what we
[302]
did in the sales comparison approach to
[304]
value that's why it's really important
[306]
to understand that process before you
[308]
jump and
[309]
jump into calculating things using the
[311]
grm
[313]
but what they're going to do is find a
[315]
you know three comparables the appraiser
[317]
is going to go out and find three
[318]
comparables
[319]
so three triplexes that have sold in
[322]
that community
[323]
and they're going to use those
[324]
comparables to generate our gross rent
[327]
multiplier or the grm
[329]
and on your screen what happens is
[331]
they're going to take the sale price
[333]
of each comparable and divide it by
[336]
the gross monthly rent that that
[338]
comparable
[339]
generated so let's look at comparable
[342]
number one
[343]
comp one sold for 168 000
[347]
it generated 900 in gross income so we
[351]
take 168 we divide it by
[353]
168 000 we divide it by 900
[356]
that gives us a factor a number of
[361]
186.67 that's called the grm
[364]
comp number two sold for 171 thousand
[368]
it generated eight hundred and fifty
[370]
dollars in income so we divide 171 000
[373]
by 850 we get a grm of 201
[377]
decimal one eight comparable number
[379]
three sold for a hundred and seventy
[381]
three thousand five hundred divided by
[383]
its gross income of nine hundred dollars
[386]
that gives us a gross rent multiplier of
[388]
a hundred ninety two decimal seven eight
[391]
so we've calculated the grm for the
[394]
comparable properties
[396]
so what's our grm that's a great
[399]
question
[401]
what we don't do is add the three grm's
[404]
together
[406]
from the three comparables and divide by
[408]
three that's the lazy way to do it
[411]
what we're gonna do or what the
[412]
appraiser is gonna do is out of
[414]
comparable number one two and three
[416]
which one feature wise looks
[420]
most like our property and i'm not going
[423]
to go into detail because we discussed
[425]
that in the video with the sales
[426]
comparison approach but in our example
[428]
let's say comparable number one
[431]
is the one that the appraiser determine
[433]
is most like our subject property
[435]
and comparable number one has a grm or a
[438]
gross rent multiplier of 186.67
[442]
so we've done step one we've calculated
[444]
our gross income
[446]
we've done step two we've calculated our
[448]
gross rent multiplier
[450]
now step number three is applying the
[453]
formula
[454]
so we take fifteen hundred dollars which
[456]
is the subject property's
[458]
gross income we multiply it by the grm
[462]
of 186
[466]
that gives our subject property value
[469]
of two hundred and eighty thousand and
[471]
five dollars
[473]
that's the formula for your licensing
[476]
exam
[477]
you don't have to go any further you're
[479]
done you know how to do the gross rent
[481]
multiplier formula
[483]
you know how to input the the numbers in
[486]
the question
[487]
you're done i want to do a sidebar here
[489]
it has nothing to do with your
[492]
uh with your licensing exam this has to
[494]
do with
[495]
your profession once you're licensed and
[497]
you get into the
[498]
into the business if you work in this
[500]
area if you work in the area of
[502]
investment property and i spent many
[504]
years in this arena
[507]
a red flag should have went up here just
[509]
looking at the comparables and looking
[511]
in our subject property the first thing
[513]
you should have noticed that our subject
[514]
property is generating fifteen hundred
[516]
dollars in income
[517]
look at comparable number one the one
[520]
that was used by the appraiser it's only
[521]
generating
[522]
900 in income what what's going on there
[527]
well number one is maybe a big maybe but
[530]
maybe
[531]
the uh appraiser used bad comparables
[536]
maybe probably not though here's
[538]
probably what
[539]
happened assuming that these are recent
[542]
i mean
[542]
if these comparables are 10 years old
[544]
then that's a bad comparable but
[546]
many times it's been my experience
[550]
the the first thing that came to my mind
[552]
here was
[553]
comparable number one two and three had
[555]
a landlord that was terrified of raising
[557]
the rent
[558]
and probably it was anywhere from 40 to
[561]
60 percent
[562]
under valued on its monthly rents
[565]
and it is something that happens all the
[567]
time ask any property manager they're
[569]
going to tell you when they take over a
[570]
property from
[571]
an owner a landlord typically it can be
[575]
uh you know 30 40 under rented
[578]
and there's a lot of reasons why the
[580]
landlord maybe has a long-term tenant
[582]
and they don't want that tenant to move
[584]
and they're afraid if they increase the
[585]
rent the tenant's gonna move
[587]
not saying it's good or bad that's just
[589]
the reality maybe the owner just doesn't
[591]
know
[593]
what the going market rate is for
[596]
monthly rents for their properties
[597]
that's usually another
[598]
indicator or another issue as well the
[601]
point is
[603]
comparable the owner of comparable
[605]
number one two and three really
[606]
shortchanged themselves
[608]
by under renting the property
[611]
it is so important for investors to keep
[613]
those properties
[615]
at market rate because remember the
[618]
income that's produced by these
[620]
properties
[621]
is converted into the value and these
[623]
owners of comparable one two and three
[627]
maybe have screwed themselves uh out of
[629]
several thousand dollars in valuation
[631]
because they
[632]
under rented their properties so i
[634]
wanted to just do a sidebar because i
[636]
knew i was going to get the question
[638]
in down below hey why is our subject
[640]
property
[641]
so much higher in value that the
[644]
comparables
[645]
well that's probably it right there okay
[647]
so anyways i just wanted to address
[649]
that discrepancy there i want to now do
[652]
an
[653]
actual uh sample of a test question you
[656]
might see
[657]
it says that a comparable duplex
[660]
remember comparable
[662]
duplex sold for 225 thousand dollars
[664]
with gross rent
[666]
of fifteen hundred dollars per month if
[668]
the subject property rents at nine
[670]
hundred dollars per month remember the
[672]
subject property is that property we
[674]
need the value for
[675]
what is the subject property's value
[677]
that's what that question is asking here
[679]
remember your formula gross income times
[682]
grm equals value and it's a three-step
[684]
process
[686]
step number one let's find the subject
[689]
property's gross income
[691]
well the test question told us that the
[693]
subject property's
[695]
gross monthly rent is 900 per month
[698]
so we have that step number two
[701]
find the gross rent multiplier using the
[705]
best
[705]
comparable now again i'm not going to go
[708]
in
[708]
to the process watch that other video i
[711]
did on the subject or the on the
[713]
sales comparison approach but let me
[716]
give you an example here maybe
[717]
the appraiser looked at three different
[719]
comparables and discovered that
[721]
comparable number one is the most uh
[724]
like our subject property they divided
[727]
the sale price by
[728]
the gross monthly income
[731]
that gave us a gross rent multiplier
[734]
of 150. so step one
[738]
we got the subject properties gross
[740]
income step two we calculated the gross
[743]
rent multiplier
[745]
number three we apply the formula so in
[747]
our formula
[748]
it is 900 that are of gross income that
[751]
our subject property
[753]
is producing we multiply it by 150 which
[756]
is the gross rent multiplier
[758]
the value of our subject property based
[761]
on this practice test question
[762]
is a hundred and thirty five thousand
[765]
dollars
[766]
that's the formula real important to
[768]
remember you have to remember these
[769]
formulas gross income comes from the
[771]
subject
[772]
property the grm comes from our
[774]
comparables
[775]
and then this method of calculating
[778]
value the grm
[779]
is for those small residential income
[782]
producing properties
[784]
single-family home to a four-plex
[787]
all right so don't forget the formula
[790]
all right now before we go i'm gonna
[791]
kill this dead horse and i know you're
[792]
sick of hearing me saying it but i need
[794]
you to remember
[795]
three approaches to valuation there's
[798]
the sales comparison approach
[800]
there's the cost approach and then the
[802]
income approach
[803]
there's two methods of calculating
[805]
income in the method approach
[807]
the gross rent multiplier which we
[809]
discussed here the next video
[811]
right here to my right that is use
[814]
that's calculating
[815]
valuation based on income using the
[818]
capitalization formula
[820]
or we call the capitalization method
[823]
all right if you have not subscribed to
[824]
the channel please do so click the
[826]
little circle to my left
[827]
and that's it for this video i will see
[829]
you in the next video
Most Recent Videos:
You can go back to the homepage right here: Homepage