Understanding cap rate, GRM, and cash-on-cash returns is essential for evaluating LA multifamily investments. These metrics help investors compare properties and underwrite deals effectively.
Cap Rate: The Income-Based Snapshot
Understanding cap rate, GRM, and cash-on-cash starts with the basics. Capitalization rate (“cap rate”) is: NOI ÷ Purchase Price
In LA today, many multifamily deals trade in the 4.5–5.5% cap rate range, depending on location, condition, and rent control status.
Investors use cap rate to:
- Compare different properties on an income basis
- Gauge whether a building is priced aggressively or conservatively
- Evaluate how property income compares to other investments
GRM: Quick Rule-of-Thumb Valuation
Gross Rent Multiplier (GRM) is: Price ÷ Gross Scheduled Income
For example, a building that collects $200,000/year in scheduled rent and sells for $3,400,000 is a 17.0 GRM.
Cash-on-Cash Return: What You Actually Take Home
Cash-on-cash focuses on the return on your actual cash invested, after financing:
(Annual Pre-Tax Cash Flow) ÷ (Total Cash Invested)
This metric is critical for leveraged investors because it reflects loan terms, debt service, and true out-of-pocket capital.
How Investors Combine These Metrics
Savvy buyers don’t rely on just one metric. Typical underwriting includes:
- Target cap rate and GRM within submarket norms
- Target cash-on-cash return that justifies the leverage and risk
- Stress tests for vacancy, rent growth, and interest rate changes
Request a valuation to see how your building stacks up.
Quick FAQs
Q: Is a higher cap rate always better?
A: Not necessarily. Higher cap rates can reflect higher risk, weaker locations, or significant deferred maintenance.
Q: How do interest rates affect cap rates?
A: When debt becomes more expensive, cap rates tend to rise as buyers demand higher returns.
Mastering cap rate, GRM, and cash-on-cash analysis will make you a more informed investor or seller. Contact me to discuss how these metrics apply to your property.