(GRM) Gross Rent Multiplier


Gross Rent Multiplier is the ratio of the price of a piece of a real estate investment to its annual rental income before expenses such as property taxes, insurance, and even utilities for vacation rental properties. Other expenses could include the cost of hiring a property management company. To sum up Gross Rent Multiplier it is the number of years the property would take to pay for itself in gross received rent. For the investor, a higher GRM (perhaps over 20) is a poorer opportunity, whereas a lower one (perhaps under 15) is better.

The GRM is useful for comparing and selecting investment properties where depreciation effects, periodic costs (such as property taxes and insurance) and costs to the investor incurred by a potential renter (such as utilities and repairs) can be expected to be uniform across the properties (either as uniform values or uniform fractions of the gross rental income) or insignificant in comparison to gross rental income. As these costs are also often more difficult to predict than market rental return, the GRM serves as an alternative to a measure of net investment return where such a measure would be difficult to determine.

The common measure of rental real estate value based on net return rather than gross rental income is the Capitalization Rate or Cap Rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return. A similar multiplier to the GRM derived from net return would be the multiplicative inverse of the Cap Rate.

Investors use a market GRM to get a quick estimate of value. A market GRM is calculated by averaging the GRM values for recent sales of similar income properties in a given market place.

Example 1:

If the sales price for a property is $200,000 and the monthly potential gross rental income for a property is $2,500, the GRM is equal to 80. Monthly potential gross income is equal to the full occupancy monthly rental amount which assumes all available rental units are occupied. Generally speaking, properties in prime locations have higher GRMs than properties in less desirable locations. When comparing similar properties in the same area or location, the lower the GRM, the more profitable the property. This statement assumes that operating expenses are proportionate for the properties being compared. Since the GRM calculation doesn’t include operating expenses, this statement might not hold true for similar properties where one of the properties has significantly higher operating expenses.

                                               Sales Price                         $200,000
  GRM (monthly) = ----------------------------------  =  ------------ = 80
                                 Monthly Potential Gross Income        $2,500

Example 2:

We have several similar properties that have sold recently in the same location and their average monthly GRM is 80.  We can use this information to estimate the value of comparable properties for sale. If our monthly potential gross income for a property is equal to $3,000, we would estimate its value in the following way.

 Estimated Market Value  = GRM   X   Potential Gross Income                                                  
                                          =     80  X    $3,000  = $240,000

A market GRM can provide a rough estimate of value, but it does have some limitations. The GRM calculation doesn’t include a property’s operating expenses and vacancy factor. We could have a situation where two properties have approximately the same potential gross income, but one property has significantly higher operating expenses. The above formula would result in a questionable estimation of the market value for these properties. Also, the above GRM formula uses the monthly potential gross income and doesn’t account for a vacancy factor which could have an impact on the accuracy of the property value estimates. The seasoned investor understands the above limitations and uses the gross rent multiplier to get a quick feel for the potential market value of an income property. The GRM is sometimes calculated using the effective gross income rather than the potential gross income thus incorporating the vacancy factor in the GRM calculation. Effective Gross income equals potential gross income minus the vacancy amount. When vacancy rates are a factor, using the effective gross income will produce a more reliable estimate. The capitalization rate is a more reliable tool for estimating the value of income producing properties since vacancy amount and operating expenses are included in the cap rate calculation.  The GRM is useful in providing a rough estimate of value.