By using this exercise you will be able to quickly ascertain if it is worthwhile asking for a proper set of income and expenses.
| Asking Price | $1,150,000 |
| # of Units | 13 |
| Cost Per Door | 88,461.53 |
| Financing 80% | 5,490.28 |
| Gross | 132,600 |
| GRM | 8.67 |
| Expenses 50% | 66,300 |
| CAP | 5.7 |
| NOI | 66,300 |
| Financing | 65,883 |
| Profit after Debt | 417 |
- This simple exercise can be done on the back of a Tim Horton’s Napkin by knowing two numbers, the purchase price, and the gross revenue. And nine out of ten times if you follow this little exercise, you will have more of an accurate value for the building than the person presenting it to you. Now if you are not using CMHC and you are prepared to make the numbers work by putting in more money than the above example is out the window and a whole lot of your money.
- With the rising cost of utilities and the reporting of expenses for the purpose of satisfying financing these buildings most of the time have an income/expense ratio of 50% with a plus or minus of 4%. Either way it is an amazingly easy first quick value assessment to see if further detailed analysis is warranted. By knowing the asking price and the correct gross revenue you can determine most of the key indicators.
- In this example the four key indicators are the cost per door, gross rent multiplier, cap rate and profit after debt.
- The price per door is obvious; however, it has many implications and should be the first number reviewed. The marketplace of the subject property will have an average price per door and buildings with a higher-than-average price per door may not cash flow as well. Buildings with a low price per door may offer an opportunity to increase that number to or above the average.
- The Gross Rent Multiplier is easy to calculate and complements the Cap Rate when compared alongside it. The lower the GRM and the higher the cap rate the better. When they are analyzed together you have a much better picture.
- Like the GRM the Cap Rate is more useful when compared with the GRM. A high Cap Rate and high GRM may indicate the picture isn’t what it appears. The relation to these two numbers is the exact opposite so beware when they are not in harmony.
- This is a business, and you need to determine and set expectations for the return your business is going to offer.
Calculations:
Cost Per Door Asking – Number of Units
Annual Gross Revenue Supplied
GRM Asking Price/Annual Income
Expenses Rule of thumb 50%
CAP NOI/Asking Price
NOI Annual Revenue/Asking Price
Financing Here is a tip if you don’t know what the multiplier is for financing use .007 (James Bond). 007 is the multiply for 7%.
Profit after Debt NOI – Financing
- By using the Gross Revenue, you eliminate the possibility of an incorrect NOI; however, you must have a strong grasp of the average income verses expense ratio for each building you are analyzing. CMHC publishes the average ratio for each class of size and is incredibly accurate when minor adjustments are made for obvious things like tenants pay hydro verses included.