Corelation between GRM and Cap rate ?

[Shankar Balakrishnan]

Hi, Is there any corelation between GRM and Cap rate when evaluating multi family home deals? Pl suggest. Thanks

[James Syed]

The reason I mentioned no direct correlation is because the two is because it's possible that these two will not run in the same direction.

For instance you can have properties where owner pays for the utilities like gas, electric and water as well, in that case you will have a lower GRM even though you will have the same cap rate.

Let's use a fourplex for example;

Each unit is rented for $500 X 4 X12 = $24,000 (Total Rent)

Assuming separately metered property, 45% of income goes to expenses = $10,800

Net Operating Income = $13,200

At 10% cap rate, price of this fourplex would be $132,000

GRM would be 5.5

Now same property but here gas, electric and water is also paid by the owner. Now Operating expenses would definitely increase (assuming) 65%, total expense would be $15,600

Net Operating Income = $8400

At 10% cap rate, price of the same fourplex would be $84,000

Hence GRM would be 3.5

So you see as GRM decreased from 5 to 3.5, cap rate stayed the same.

@Michael Seeker hope it clears up a little more. A typical expense ratio for a multifamily property is somewhere between 45% to 65% depending upon who pays for the utilities. We can't automatically assume for cap rate and GRM to run in the same direction.