The gross rent multiplier (GRM) gives real estate investors a way to determine the value of a property and compare it to other rental properties on the market. Although there are limits to what the GRM can tell you, it’s still a good way to do a basic assessment of a property.
If the GRM is too high compared to other properties in the same area, it could indicate the property isn’t a good investment.
What Is Gross Rent Multiplier?
The gross rent multiplier (GRM) is a tool investors use to evaluate an investment property by looking at the potential rental income. GRM is expressed as a ratio of the current market value or sale price of the rental property and the annual gross rental income for easy comparison between comparable properties.
GRM helps real estate investors calculate how profitable different rental properties may be based on their gross annual rental income. It’s a helpful formula to use when the market is changing quickly, in addition to looking at fair market comparables.
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Gross Rent Multiplier Formula
So now that you understand what GRM is, how do you put it to practical use? Let’s look at the formula for calculating GRM and how to know what a good gross rent multiplier is.
How To Calculate Gross Rent Multiplier
Here’s the formula you’ll use to calculate the gross rent multiplier:
- Gross Rent Multiplier = Property Price (or current market value) / Gross Rental Income
Let’s say you’re considering investing in a multifamily property but want to know the GRM first. The property price is $2 million, and the gross rental income is $350,000, giving you a GRM of 5.71. In general, a lower GRM will bring in more income over time.
Of course, in some scenarios, you may not know the property’s estimated annual gross rental income. In this situation, you’d need to do more research and see what comparable properties are charging for rent.
What Is A Good Gross Rent Multiplier?
A good gross rent multiplier is usually between four and seven, as this indicates the property is well-priced. If the GRM is too high, that indicates the seller is asking too much for the property. In the example above, the GRM would be considered good, since it falls in that range.
Is GRM Different From Cap Rate?
Yes, the GRM and capitalization rate are two different tools used in real estate valuations. The GRM is used to estimate the value of an income-producing property based on the gross rental income. It’s a simple way to compare the income potential of several different properties but doesn’t consider the expenses, financing costs or vacancy rates that may come with the property.
The cap rate is also used to determine the potential return on investment (ROI) of a property, but it does this by dividing the net operating income (NOI) by its current market value (or sale price). And a high cap rate suggests a higher return on investment. Since the cap rate considers both the income generated by a property and its operating expenses, it’s a more comprehensive way to measure profitability.
The Bottom Line
The gross rent multiplier provides an easy way to compare multiple properties. It can help you understand whether that property is a good investment or whether you should keep looking.
However, the GRM is only a starting point since it doesn’t consider the operating expenses and should be used alongside other investing tools.
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FAQs
The Gross Rent Multiplier (GRM) is an important metric used in commercial real estate to determine the value of a property. It is calculated by dividing the sale price of a property by its annual gross rental income.
What is a good GRM value? ›
However, you want to shoot for a GRM between 4 and 7. A lower GRM means you'll take less time to pay off your rental property, which means it will likely be more profitable.
What is the 1% rule for GRM? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
What is the GRM explained? ›
Gross rent multiplier (GRM) is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, and utilities; GRM is the number of years the property would take to pay for itself in gross received rent.
What is the 2% rule in real estate? ›
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
What is the gross rent multiplier for an apartment whose total rents are $98000 with a value calculated at $750,000? ›
Question: What is the Gross Rent Multiplier for an apartment whose total rents are $98,000 with a value calculated at $750,000 :7.6530.
Is a GRM of 20 good? ›
GRM of 20+: This is typically a hot property in a hot area in a seller's market. You are not going to cashflow positively on this property despite how much you put down, however, the potential for appreciation is outstanding. GRM of 17-20: Great property in a great area in a seller's market.
What is the gross rent multiplier for a house renting for $900 per month and it sold for $126000? ›
Final answer:
For a house renting at $900 per month and selling for $126,000, the GRM is 11.67, which rounds to 12, not matching any of the provided answer options.
What is a possible drawback of using the gross rent multiplier (GRM) approach in analysis? ›
Drawbacks of GRM
The biggest disadvantage to the gross rent multiplier calculation is that the formula doesn't factor in operating expenses. Because of this, a property with a low GRM may not be as attractive an investment as it seems, if there is a significant amount of deferred maintenance.
Does GRM deduct operating expenses? ›
Does GRM deduct operating expenses? No, GRM does not account for operating expenses. It solely considers the gross annual rental income and the property's price. This is a limitation of the GRM because two properties with the same GRM might have vastly different operating expenses, leading to different net incomes.
The biggest advantage of the GRM metric is that it is easy and quick to calculate. The disadvantage of using the GRM for evaluating an income property, however, is that it is base the GSI, which means that it does not take into account the income property's vacancy rate or it operating expenses.
What's the difference between GRM and gim? ›
GRM provides a focused view based on rental income, whereas GIM offers a broader perspective on a property's overall income potential. Neither metric accounts for operating expenses, vacancies, or capital expenditures, and are best used alongside more comprehensive valuation methods.
What is a good GRM for a rental property? ›
The lower the GRM, the faster you pay off the property, while the higher the GRM, the longer it takes to pay off the property, using rental income. On average, aim for a GRM of 4 to 7. That's the ideal number. Some investors may prefer a higher or lower Gross Rent Multiplier as a personal preference.
What is the formula for the GRM multiplier? ›
Here's the formula you'll use to calculate the gross rent multiplier: Gross Rent Multiplier = Property Price (or current market value) / Gross Rental Income.
What is the purpose of GRM? ›
A Grievance Redress Mechanism (GRM) is a locally based, formalized way to accept, assess, and resolve community feedback or complaints.
How do you interpret gross income multiplier? ›
A gross income multiplier is a rough measure of the value of an investment property. GIM is calculated by dividing the property's sale price by its gross annual rental income. Investors shouldn't use the GIM as the sole valuation metric because it doesn't take an income property's operating costs into account.
What is a good gross rental income? ›
The 1% Rule is another way of using gross rents to place a value on a property. The 1% Rule states that gross monthly rents should be equivalent to at least 1% of the purchase price. For example, a property that sells for $500,000 should generate $5,000 in gross rents per month.
What does the net income multiplier tell us? ›
In the real estate industry, the net income multiplier (NIM) is an investing metric calculated as the ratio between the purchase price of a given property and its annual net operating income (NOI). Property Purchase Price → The price at which an investment property can be acquired by a buyer in the market.
What is the gross rent multiplier an appraisal rule of thumb best suited for? ›
The Gross Rent Multiplier (GRM) is a useful tool for investors when it comes to valuing a commercial real estate property. It is a simple calculation that takes into account the gross rents of a property and can help investors quickly determine the potential value of a property.
