My last topic included responses ( from Hibby) with these figures. Can someone tell me how these are computed and what they mean? [ Edited by BethE on Date 12/03/2003 ]
DSCR = Debt Service Coverage Ratio, also called Debt Coverage Ratio (DCR)
NOI = Net Operating Income
NOI - (annual Debt Service) = Cash Flow
NOI / (annual Debt Service) = DCR (DSCR)
While your income property may generate a positive Cash Flow, the DCR indicates whether the cash flow is large enough to maintain the property. By definition, a DCR of 1.0 is breakeven. For commercial loans on residential use property, lenders generally like to see a DCR of 1.3 or higher.
Generally speaking, this rule of thumb is more effective in considering the value of a property with current tenants with set rents. A GRM calculation ignores operating expenses, vacancy factors, and maintenance reserve requirements. A more detailed cash flow analysis is needed to determine profitability.
In my own experience, a GRM or 6.0 or less usually generates a positive cash flow, while a 7.0 or higher is usually negative. In the middle, bears more detailed analysis.
If you prefer, you can use your monthly rental income instead of annual rental income in the GRM calculation. You just end up with a larger number for your reference point. For example, a $120K property that rents for $1000 per month will have a GRM of 10.0 if you use annual rent, and a GRM of 120 of you use monthly rent.[ Edited by DaveT on Date 12/03/2003 ]
What is a good GRM? Hibby said one of the properties I'm interested has a GRM of 1.77. How high does the average range go. Is 1.77 great, fair, or so so?
Thanks DaveT...you are a wealth of information!
I will defer to Hibby here. My experience is only with residential rental property, and not the type of commercial use properties mentioned in your previous post.
For a strip center, I am not sure that I see the value of a GRM calculation here. If your tenants have net leases (they pay for maintenace, utilities, interior modifications, and store fixtures) and share expenses of garbage disposal and parking lot maintenance, you are only left with property taxes and building insurance.
You would also want to be sure that your longer term tenants don't expose you to inflation risk. Protect yourself with an inflation adjusted or percentage-of-sales system for computing rents, rather than a fixed rental.
As I said, I have no direct experience with these types of commercial property, so consider that I am out of my element when you read my comments.
You may be out of your element but you have brought up good points here that I will have to research. I think the leases are a flat rate for the next three years...if this is the case and the #'s make sense...I will still be in good shape - right? In three years I will be in for a hike of rents. Doesn't sound bad to me. I'll let you all know what I find. You've been a great help.
[ Edited by BethE on Date 12/03/2003 ] 
[ Edited by DaveT on Date 12/03/2003 ]
DSCR = Debt Service Coverage Ratio, also called Debt Coverage Ratio (DCR)
NOI = Net Operating Income
NOI - (annual Debt Service) = Cash Flow
NOI / (annual Debt Service) = DCR (DSCR)
While your income property may generate a positive Cash Flow, the DCR indicates whether the cash flow is large enough to maintain the property. By definition, a DCR of 1.0 is breakeven. For commercial loans on residential use property, lenders generally like to see a DCR of 1.3 or higher.
GRM = Gross Rent Multiplier = (purchase price) / (annual gross rent)
Generally speaking, this rule of thumb is more effective in considering the value of a property with current tenants with set rents. A GRM calculation ignores operating expenses, vacancy factors, and maintenance reserve requirements. A more detailed cash flow analysis is needed to determine profitability.
In my own experience, a GRM or 6.0 or less usually generates a positive cash flow, while a 7.0 or higher is usually negative. In the middle, bears more detailed analysis.
If you prefer, you can use your monthly rental income instead of annual rental income in the GRM calculation. You just end up with a larger number for your reference point. For example, a $120K property that rents for $1000 per month will have a GRM of 10.0 if you use annual rent, and a GRM of 120 of you use monthly rent.[ Edited by DaveT on Date 12/03/2003 ]
What is a good GRM? Hibby said one of the properties I'm interested has a GRM of 1.77. How high does the average range go. Is 1.77 great, fair, or so so?
Thanks DaveT...you are a wealth of information!
I will defer to Hibby here. My experience is only with residential rental property, and not the type of commercial use properties mentioned in your previous post.
For a strip center, I am not sure that I see the value of a GRM calculation here. If your tenants have net leases (they pay for maintenace, utilities, interior modifications, and store fixtures) and share expenses of garbage disposal and parking lot maintenance, you are only left with property taxes and building insurance.
You would also want to be sure that your longer term tenants don't expose you to inflation risk. Protect yourself with an inflation adjusted or percentage-of-sales system for computing rents, rather than a fixed rental.
As I said, I have no direct experience with these types of commercial property, so consider that I am out of my element when you read my comments.
You may be out of your element but you have brought up good points here that I will have to research. I think the leases are a flat rate for the next three years...if this is the case and the #'s make sense...I will still be in good shape - right? In three years I will be in for a hike of rents. Doesn't sound bad to me. I'll let you all know what I find. You've been a great help.