What are some of the indicators that investors use to judge value?
Capitalization Rate (CAP Rate) – The initial measure of return of an investment excluding the effects of financing. Gross Rent Multiplier (GRM) – The GRM is the ratio of price to annual scheduled income, and is calculated by dividing price by annual income. Intrinsic Value – Intrinsic value refers to the amount of physical building you receive for your dollar. Replacement Cost – Replacement cost valuation reflects value by assessing or estimating what it would cost to reconstruct an identical new building in a comparable location. Investors are obviously more comfortable when a purchase can be completed below replacement cost. Comparable Sales – A comparable sale is one that is similar to the subject in location, size, style, income, units, amenities, etc. By knowing what other comparable buildings in similar locations are listed at or have sold for, investors can use the CAP rate, GRM, and cost per foot/unit methods to justify a building’s value.
