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Tips on Commercial Real Estate

What is the GRM in real estate?

Grm in real estate1

Get ready for a little bit of basic math as we define the GRM in real estate investing and compare it to the capitalization rate. Both the GRM and capitalization rate (also known as the “cap

Get ready for a little bit of basic math as we define the GRM in real estate investing and compare it to the capitalization rate. Both the GRM and capitalization rate (also known as the “cap rate”) are important metrics for investors to consider when looking at an investment property. If you are interested in real estate investing this will be a good read for you. I’m guessing that most readers who are interested in getting their real estate license have at least toyed around with the idea of investing in real estate. The gross rent multiplier represents the relationship between the gross income that a property produces and its potential purchase price or value. It is a simple back-of-the-envelope way to represent the multiple of the gross income relative to the property’s purchase price - the GRM is not a measurement of time (more on that later). As a general rule, the higher the GRM the more pricey the property is relative to the income. The lower the GRM the more of a “value” investment the property might be. Investors looking for the most “bang-for-their-buck” might seek out properties with lower GRMs as the multiple of gross income to the amount invested is lower. Examples of the GRM As an extreme example, consider the property below. Purchase price = $100,000 Gross yearly income = $100,000 In the above case, the GRM would be 1x. The purchase price of this property equals the gross rent collected. This is an impossible and extreme example but it illustrates just how good of a deal this would be if it were true. Imagine a property that rents for $100,000 per year (or about $8,333 per month) that you could buy for only $100,000. This would be such a good deal that you would have to get in line and fight hundreds of other investors for it. More likely, is that if a property rents for $100,000 per year that it would cost something like $2,000,000 or 20x the gross rent collected. Again, lower gross rent multipliers can generally represent better value purchases for investors and higher gross rent multipliers mean that the investor is paying more for every dollar of rent collected. More Realistic Examples of GRM Property 1: Purchase price $2,500,000 Gross annual income of $50,000 $2,500,000 / $50,000 = The purchase price is 50x the gross rent collected. Property 2: Purchase price $1,750,000 Gross annual income of $75,000 $1,750,000 / $75,000 = The purchase price is 23.3x the gross rent collected. Drawbacks to the GRM There are some drawbacks to using the gross rent multiplier method as the only way to value property. Because only the gross rent is considered expenses are not factored into this equation. This is a key distinction between the gross rent multiplier compared to the capitalization rate of a property. Unlike the GRM, the cap rate does consider expenses like property taxes, insurance, maintenance and management to name a few to calculate net operating income. The GRM merely looks at the total rent collected relative to the gross income of the property. Investors may look at both the gross rent multiplier and the capitalization rate to determine whether or not a property is a good investment and compare it with other properties the investor might be considering. However, rarely will an investor only consider the GRM. What is the difference between the GRM and cap rate? The Gross Rent Multiplier and the capitalization rate are two wildly different methods of valuing an investment property. As I mentioned above, the GRM is a very simple way to find out how many times the gross rent collected will equal the value. The capitalization rate on the other hand is a way for an investor to determine the annual rate of return. Formulaically, the capitalization rate is calculated by taking the net operating income that the property produces and dividing it into the purchase price. If you are interested in learning more about the cap rate check out the first in a 3 part series here: As a matter of practice, most investors will give more credence to the capitalization rate as opposed to the GRM. Why the GRM isn’t a measure of the number of years it will take to pay off the property There are several problems with assuming that the GRM is the number of years it will take to recoup your investment. The first fallacy with considering GRM as a measurement of time is that it does not take into account expenses. If a property produces $50,000 per year in gross rent, the GRM does consider property taxes, insurance, maintenance, management nor does it include any debt service that the investor might be paying to secure the investment. The second issue with considering GRM as a measurement of time is that rent typically increases as time progresses. The gross rent multiplier only considers the current rent not any future rent increases. For the above two reasons, it is inaccurate to assume that the GRM is some measurement of the “number of years” it would take to recoup your investment because it doesn't include expenses, nor does it include any future increases in rent. Both of these affect the amount of time it will take to get your investment back. Does a buyer want a high GRM or a low GRM? Generally, as a buyer, a low GRM is preferred. Lower GRMs generally represent better deals for buyers because the ratio of the gross income to the purchase price is lower. Higher GRMs generally mean that the buyer of an investment property is paying more for every dollar in income that the property produces. Closing thoughts While not perfect, the gross rent multiplier is still a common method that investors used to analyze a particular property. Keep in mind that this is not the ground truth golden method, because expenses are not considered. If you are considering signing up for real estate school we would love to have you! Love, Kartik
Tips on Commercial Real Estate

6 Things To Consider When Starting as a Commercial Real Estate Agent

6 steps to becoming a commercial

Starting a career in real estate and obtaining your real estate license opens up a new world of opportunity to you.There are so many different career paths that can be taken one you get your real estate

Starting a career in real estate and obtaining your real estate license opens up a new world of opportunity to you.There are so many different career paths that can be taken one you get your real estate license. While it’s true that most of our students start their career selling houses, commercial real estate (CRE) is also an option for you in California. There are similarities between both areas of practice as they involve helping clients buy, sell and lease property so the desired outcome is the same. The high level difference is that the clients to whom you provide services are simply looking at a different class of property. A common misconception is that the commercial side of the business is somehow more complicated than residential but in many ways the opposite is true. Commercial files can be thinner because there are many forms and documents that are required in residential real estate that don’t exist in the commercial world. In any case, if commercial is an area of specialization you find appealing,here are some things to consider and things you’ll need to do: 1. Obtain a real estate license Every real estate agent, regardless of whether they plan to work in residential or commercial real estate, must meet specific criteria and pass an exam. Individual states set their own criteria, so be sure to research your state’s process. Generally speaking, you must meet eligibility requirements, take approved re-licensing real estate classes , and pass the real estate exam to obtain a license. 2. Find a firm specializing in CRE After you choose a real estate school and receive your real estate salesperson license in California, you’ll have to place your license under a broker. Once you select a broker, the firm will dictate the type of real estate you can practice. If you want to pursue work in the CRE market you will have to find a broker that has the bandwidth and resources to conduct commercial sales and leasing. This is where it can get a little sticky because most residential firms don’t offer the tools needed to do commercial real estate and most commercial firms don’t offer the residential tools to sell a house. 3. Get trained up in commercial real estate Finding someone to mentor and train you to practice commercial real estate is not as easy as finding a residential mentor. Part of why this is true is that there are far more residential real estate agents than there are commercial ones and residential firms are typically more eager to hire than commercial ones. There are large commercial companies like CB Richard Ellis and Jones Lang LaSalle that might hire you with the right resume and connections, or you can explore working at a more boutique local shop in your area. The key thing here is to find solid training and a mentorship program that will allow you to start your commercial real estate career properly. 4. Identify an area of specialty Many residential real estate agents specialize in certain types of homes,such as retirement communities, townhouses, luxury homes, or another niche. The commercial real estate industry tends to be even more specialized than this.The commercial real estate world tends to be broken down into five pillars: Retail - Shopping centers Industrial - Warehouse type uses Office - Larger or single tenant office spaces Raw land - Developer specialization Apartments/multi family sales - 5 or more apartment units While there can be some cross-over between these two functions there is still a high level of specialization. 4. Identify an area of specialty Not unlike residential real estate, you need to have marketing and branding strategies in your toolbox. In addition to the types of properties you want to specialize in, your plan should include factors such as how to target clients, budgets, unique selling points, and strategies to client outreach. These branding and marketing initiatives can include real estate postcard mailing, really cool property photos, or a social media strategy. 6. Explore other career possibilities One of the benefits of working in the commercial real estate field is the ability to expand your practice. Besides an area of specialization, there are opportunities to participate in arranging financing for a property, performing property management, or (as mentioned above) negotiating tenant leases. Just how wide of a net you can cast is going to be dependent on your brokerage and the services that they offer. If your brokerage doesn’t have a trust account and accounting systems created, you won’t be able to legally conduct property management so you’ll want to explain your aspirations to your broker and see if they have a system to support your endeavors. A final thought Because sales prices are generally higher on commercial properties than residential ones commercial agents often find they can earn larger commissions, which can equate to higher annual earnings. Many agents who specialize in this area find it to be a lucrative, exciting, and rewarding experience. It's important to know, success doesn't come overnight, it takes effort and experience. The large commercial deal sizes can have a negative impact on the commissioned real estate agent, however.If your entire earnings for the year are dependent on one large deal that ends up falling apart this can put you in a precarious position. Nevertheless, if commercial real estate sounds appealing to you,you need to start with our real estate license course.Register today so we can help you prepare for a lucrative career in the commercial market. Love, Kartik
Tips on Commercial Real Estate

How Much Do Commercial Real Estate Agents Make?

Commercial real estate agent closing a sale

People considering signing up for real estate classes commonly ask the question “Can I do commercial real estate once I get my real estate license?” The answer to this may vary depending on your state.

People considering signing up for real estate classes commonly ask the question “Can I do commercial real estate once I get my real estate license?” The answer to this may vary depending on your state. In the case of California, our Department of Real Estate makes no distinction with regard to licensing commercial or residential real estate agents. The same license to sell a house would be the same license to sell a large building . While this is encouraging for the new licensee considering beginning a new career, it’s important to understand that there are different specialities as it relates to the world of commercial real estate. The five commercial real estate disciplines are office, retail, industrial, multifamily and raw land sales. With the exception of land, each of these areas have a couple of different ways to make money: Leasing and sales. While real estate commissions are negotiable in California, the typical percentage earned is 3-6 percent of the transaction value regardless of whether you are leasing or selling the underlying real estate. As an example - Let's start with a commercial lease. Imagine you are a commercial leasing agent and you have a dentist looking for 3,000 square feet of space in Los Angeles, and the rent is set at $3 per foot. She is likely going to be signing a lease for a five year term or 60 months. 60 months x $9,000 per month is a $540,000 lease value. This doesn't take into account annual rent increases that you'll likely be paid on also. Generally, representing this dentist would yield you a $16,200 commission. ($540,000 x 3% = $16,200) This is a handsome payday considering there's no escrow period, no appraisal, and there’s no home inspection. No request for repair or even a termite report. You sign the lease, generate an invoice and get paid. On commercial sales, the commissions can be even larger. Imagine a $6 million office building. You would generally get 3% of this. Your commission would be around $180,000. Not bad. Commercial real estate can be a lucrative career for someone seeking something a little different from the day to day life of selling houses. What's also nice about commercial real estate is that there are so many different disciplines. You can focus on selling shopping centers or office buildings, or even helping developers find land on which to build. Each one of these practice areas requires a different skill set and has unique vocabulary depending on what you are selling. For example, in industrial real estate the wiring and power capacity might be important. Do we have 3-phase power? In retail the co-tenancy would be a consideration. Who are the other retailers in the center and how can they help drive traffic to my store? Office and the other disciplines have their own unique considerations. When you get your real estate license in California, it doesn’t have to be about just selling houses. There are a lot of other career choices that are less competitive, but more lucrative than residential. If you are considering doing both it’s important to bear in mind that very few real estate companies do both well. The skillset, paperwork and databases to sell houses are actually different than those associated with selling commercial. That's why it's important to make sure that when you do get your real estate license in California, you are lined up with a brokerage that can set you up to succeed. Commercial real estate databases like LoopNet or CoStar can be quite expensive and most residential real estate companies don't have active subscriptions. Similarly, most commercial real estate companies don't have MLS access like a Century 21 or Keller Williams would. If you have any questions about getting your license or if I can help you get started please call me at 888 768 5285 or drop me a message. Love, Kartik