WHAT IS GROSS RENT MULTIPLIER?
The ratio of a property's price to gross rental income. It tells you how long it will take for an investment property to pay for itself.
For a prospective real estate investor, a lower Gross Rent Multiplier ("GRM") represents a better investment opportunity.
Similar to other property valuation methods, GRM is effective for screening, valuing, and comparing investment opportunities. But in contrast to other valuation methods, GRM analyzes properties based only on its gross income. It does not factor in expenses (property taxes, insurance, utilities, etc.)
The Gross Rental Multiplier (GRM) is easily calculated but isn't a very precise tool for getting to a true value. However, it is an excellent first quick value assessment tool to see if further, and more detailed analysis is worthwhile. If the GRM is too high or low compared to recent comparable sold properties, it probably indicates a problem with the property or gross over-pricing.
Investors actively seeking properties often have several on their radar. They need to find a way to quickly rank opportunities so they can spend their time in deeper analysis on the best opportunities first.
Use our handy calculator to quickly calculate GRM.
An illustration of how to utilize GRM in your investment planning is listed below. As always, if you have questions, we're here to help. Contact Us.
EXAMPLE
Acquire the GRM for recently sold properties.
Market Value / Annual Gross Income = Gross Rent Multiplier (GRM)
A property sold for $850,000 / $125,000 Annual Income = GRM of 6.80
Use GRM to estimate the property value.
Let's say that you did an analysis of recent comparable sold properties, and found that, like the one above, their GRM averaged 6.80. Now you want to approximate the value of a property you are considering purchasing. You know that its gross rental income is $68,000 annually.
GRM (6.80) x Annual Income ($75,000) = Market Value ($510,000)
Evaluate.
If the property is listed at $595,000, you may want to investigate further to see if the seller might reduce their price. If the property is listed at $495,000, then you may want to consider purchasing this property. The next steps would include reviewing needed repairs, evaluating property taxes and potentially increasing the rent to add even more value.
