When selling your park, it’s good to keep in mind that there are no one size fits all equations. There are a number of approaches to take that may fit your circumstances better. In our previous article, we discuss the distinction between the different kinds of cap rates, and how your NOI plays a role in determination.
Today, we’ll be discussing a few other factors and approaches, namely the GRM and cash on cash returns. Read on to learn more!
From a pricing standpoint, the NOI and the cap rate are not the only relevant factors in a deal. There are several other metrics that a lot of people use. The GRM (Gross Rent Multiplier), for example, refers to another method of using revenues and the park’s asking price to come up with a valuable figure. It’s good to note, though, that a GRM does not take into account any expenses, at least at that point.
So let’s say you’re selling your park for $5 million, and it currently produces $1 million in revenue. That would be a 5 GRM. That’s a figure that people can use to adequately evaluate a deal. This sets an expectation of how long it will take buyers to get a real return on their investment. All of these figures thrown around may seem ultra complex, but as the example shows, it’s not as daunting as it appears.
Another factor that determines said return on investment is the financing of the deal. Most people are looking for what’s called a cash on cash return. Nailing this figure down to a provable degree will often be a strong determining factor in their interest in the deal. To get to this figure, you take your NOI, and subtract whatever your debt service obligations are from it. This refers to the amount it will take to get right side on the debt incurred when financing.
So if you have a $100,000 NOI, and a $50,000 debt service, you would have $50,000 left over. That last figure is your cash flow; you get your cash on cash return by taking this against how many actual dollars of your own money that you put into the deal. This is substantially more relevant to most interested parties than the aforementioned cap rate figure.
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