Suppose you want to buy an apartment building or obtain a commercial loan on a multifamily property. You can quickly compute the value of any multifamily property, if you know that property’s Gross Scheduled Rent and the correct Gross Rent Multiplier for that area. The Gross Rent Multiplier is a number, usually between 3 and 11, by which you multiply the Gross (Annual Scheduled) Rents to obtain a rough estimate of the value of an apartment building. Expressed algebraically:
You’re in a car with your commercial broker, and the two of you are driving around a good rental area in your city, looking for an apartment building to buy. You come to a decent looking building that is for sale. Your commercial broker looks up the Gross (Annual Scheduled) Rents and tells you that they are $263,000 per year. “What’s the going Gross Rent Multiplier for this area?” you ask him. Around seven,” he replies. You multiply $263,000 by 7 to compute a market value of $1,841,000. “What’s the seller asking?” you ask your broker. He replies, “$2,670,000.” “Ha-ha,” you laugh. The seller is on drugs if he thinks that he is going to get that much.” You find another nice building. “What are the Gross Rents of this property?” you ask. “$301,000,” replies your commercial broker. You multiply $301,000 times 7 to arrive at a market value of $2,107,000. ‘What’s the seller asking?” “$1,995,000.” “This looks like a decent value. Let’s get out and walk around,” you reply with interest.
You’re a commercial mortgage broker. A borrower calls you looking for a $3 million multifamily loan. He owes $2,850,000 on the property, and the loan is ballooning. “What’s the building worth?” you ask the borrower. “$4.25 million,” he replies defensively. Instinctually your radar flashes a warning. “He’s lying,” you think to yourself. “What are the gross rents on the building?” you ask the borrower. “$473,000,” he replies guardedly. You’ve lived in Las Vegas your entire life, and there’s a ton of vacant land surrounding the outskirts of the city. The Gross Rent Multiplier in Las Vegas has never exceed 5.5. Five point five times $473,000 equals just $2,600,000. Just $2.6 million? Heck, the borrower owes $2.85 million. This deal is a loser. “Who has turned you down on this deal already?” you ask. “Boston Nation, Pebble Stream Capital, and San Diego Apartment Express.” he replies, naming the three most aggressive multifamily lenders in the market. “Can you bring a load of cash to the closing table?” you ask. “No,” he admits. “Do you own some other property that we can refinance?” “No, just my house, and its has an 80% LTV loan on it.” “I’m sorry, Mr. Borrower, but I can’t help you. You need to do a short sale.” By understanding and knowing the Gross Rent Multiplier, you just saved yourself six weeks of wasted work.