Please forgive me if this is a dumb question. But I am looking to refinance my rental property and was wondering if the mortgage is considered an expense in regards to determining the value, cap rate, GRM? I know we have the normal expenses such as water, trash, etc…but is the mortgage considered the same?
Mortgage interest is an expense when you are doing your income taxes.
Debt service is a factor when doing your cash flow analysis. If you are planning to refinance with a commercial loan, the debt service will definitely be used to determine whether the net operating income from the property is sufficient to support the size of the loan you are seeking.
NOI, GRM, and Cap Rate calculations all assume that you own the property free and clear. In other words, the cost of your financing is not considered in these calculations because debt service is not an operating expense.
The mortgage is considered “debt” and is not an operating expense. Debt does not enter into the equation when you’re calculating value, cap rate, or GRM.
Value (market value) is what the property is worth today and has nothing to do with what you borrow.
Cap rate = NOI (net operating income) divided by value (or purchase price) and doesn’t have anything to do with how much you borrow.
GRM (Gross rent multiplier) is determined by multiplying the gross rent by some number (the multiplier) to get a rough idea of value and again has absolutely nothing to do with borrowing money.