Commercialinvestors also need to determine their capitalization rate (CAP RATE) and Gross Rent Multiplier (GRM) to decide if an investment is a good decision.
The CAP RATE and GRM are useful calculations when investing. The cap rate formula is Annual Net Operating Income/Purchase Price. Usually, a sound investment has a 6.5-10% cap rate.
For example, if an investment property costs $1 million dollars and it generates $65,000 of NOI (net operating income) a year, then it’s a 6.5 percent CAP rate. A higher cap rate means a higher risk investment. A lower cap rate means an investment is less risky. So, proceed with caution. A property with a high cap rate might not be the best investment for you. A large loss to a small investor has a much larger impact than the same amount to a wealthy investor with deep pockets.