TM 1031 Exchange
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Cap Rate, Cash on Cash, Gross Rent Multiplier In the world of investment real estate the terms “Cash on Cash” (COC), “Capitalization Rate” (Cap Rate), “Gross Rent Multiplier” (GRM), are utilized by investors to compare various opportunities in the market place. It is important to remember that the higher the return the higher the risk.

The “Cash on Cash” (COC) return of an investment is the net cash flow to the investor after deducting all expenses including debt service.

Cash Invested: $100,000
Net Cash Flow: $12,000
COC: $12,000/$100,000 = 12%

The cash on cash return and the cap rate will be the same if there is no debt service.

Investors can increase or decrease their cash flow on an investment by the type of debt placed on the property. Cash flows can be increased by using interested only debt, debt with an interest rate less than the cap rate and by varying the time to pay the debt.

The “Cap Rate” reflects the return on the investment if there is no debt service included in the calculation. Cap rate is calculated by dividing the Net Operating Income (NOI) by the Purchase Price.

NOI: $100,000
Purchase Price: $1,000,000
Cap Rate: $100,000/$1,000,000=10%

The NOI is the money remaining after all of the “operating expenses” are paid, not including debt service.

The Gross Rent Multiplier (GRM) is the gross income with no expenses divided by the purchase price. Most frequently GRM is used to compare smaller multi family properties.

Gross Income: $100,000
Purchase Price: $1,000,000
GRM: $100,000/$1,000,000=10

None of these methods address the quality or the risk associated with the investment. To determine the risk of an investment the investor needs to consider the credit of the tenant(s), demographics and the terms of the leases among other things.

It is important to remember that all these methods are a starting point and a handy way to compare various investments and should not on their own be used to determine the risk or suitability of a given investment.

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