noob questions

ok can someone please tell me the meanings of these two terms?
cap rate
gross rent multiplier
thanks all


Both terms are defined in this site’s “Investing Glossary”.

Hope this helps.


Cap Rate (tasa de capitalizacion):

The percentage selected for use in the income approach to valuation of improved property. The CAP rate is designed to reflect the recapture of the original investment over the economic life of the improvement to give the investor an acceptable rate of return (yield) on his or her original investment and to provide for the return of the invested equity. In other words, if the property includes a depreciating building, the CAP rate provides for the return of invested capital in the building by the end of the economic life (the recapture rate that allows for building future depreciation) and the return on the investment in the land and the building (similar to yield).

Gross Rent Multiplier (multiplicador de ingreso bruto):

A useful rule of thumb for estimating the market value of income-producing residential property. The multiplier is derived by using comparable sales divided by the actual or estimated monthly rentals to arrive at an acceptable average. By multiplying the estimated rent of the property under consideration by the multiplier, one can compute a rough estimate of the property’s market value. Only a rough estimate of value is thus produced because the gross rent does not allow for variations in vacancies, uncollectible rents, property taxes, management and similar unpredicatable circumstances. To be most accurate, the estimate should generally be based on unfurnished rentals.

Use of the gross rent multiplier, sometimes called the gross income multiplier, has slowly been declining during the past several years because it is a very crude guideline that does not take into consideration the tax ramifications of different ranges of investors and does not recognize alternate methods of financing.

-Mike Simpson