today I want to document some terms related to real estate investment with simple words.
NOI or Net operating income
NOI or net operating income is income after all expances but before morgage payment ( in case of real estate ).
Cap rate or capitalization rate is something which says what profit you'll get in percentage from benefiting something that you use during one year.
I assume with example it will be easier to understand.
Suppose, you want to buy a flat which you plan to give as a rent for others.
You pay for buying a flat 40 000$. Monthly rent of flat income after paying all bills is 350$. What is cap rate ( capitalization rate )? Below goes the formula:
If you apply this formula to already described case you'll get the following:
NOI * Cap rate
There are people for whom is convenient to consider result of multiplication of NOI on Cap rate. They consider any value of flat as result of multiplication. For which metrics such multiplication can be applied? That is actually income of investor in case if they buy some real estate with money. In case of already mentioned flat it will be 4200$ or yearly income from flat.
GRM Gross rate multiplier
Let's start again with formula of it:
honestly for me GRM and Cap rate are pretty the same beast.