What is the Gross Rent Multiplier (GRM) In Real Estate?

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Have you ever found multiple promising properties at once and wished that there was a quick and simple way to compare them all, without having to do a full analysis? The gross rent multiplier might be exactly what you’ve been looking for.

It is a simple formula that investors can use to compare and contrast the value of rental properties. Oftentimes, it can be a helpful tool to sort out desirable properties from their less profitable counterparts. By doing this, you can determine which ones are worthy of a deeper financial analysis.

Read on for a breakdown of how to use the gross rent multiplier, as well as when it is most effective.

What Is A Gross Rent Multiplier

A gross rent multiplier (GRM) is a formula used by real estate investors to compare the potential rental income of different properties. This valuation technique is a simplified way to analyze properties without having to complete a full analysis. Real estate investors of all skill levels rely on this formula to quickly compare properties across portfolios and make fast-paced investment decisions.

It is worth noting that the gross rent multiplier is not to be used in place of a thorough property analysis. Instead, it is best used to eliminate properties before performing an in-depth analysis of more promising candidates.


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gross rent multiplier formula

Why Is The GRM Important?

The GRM is important to investors because of its usability and speed. The formula itself utilizes only two variables: rental property value and gross property income. There are a number of formulas in real estate investing, but almost none are as simple as the GRM. Investors typically have access to both numbers and can perform this calculation with ease. These also happen to be the variables that lenders care about the most when evaluating potential investments (price and potential return). In calculating the GRM, investors get their first look at the factors they may present to lenders when raising financing.

The GRM is also known to be particularly beneficial for commercial real estate investors who may be working in highly competitive environments. Commercial real estate often requires investors to be able to make fast-paced decisions about where to delegate their time and resources. The GRM can be quite an effective tool in doing so, as it allows users to easily compare potential investments.

How Do You Calculate The Gross Rent Multiplier

Calculating the gross rent multiplier is simple. You take the market value of a property and divide it by the property’s gross rental income. How you do this is up to you: you can use the sale price, list price, or the appraisal value of a property. You can even choose between monthly or annual income. When using the gross rent multiplier formula, you’ll want to make sure to keep the factors consistent across all the properties you are considering. Otherwise, any comparisons you make will be invalid.

Gross Rent Multiplier = Rental Property Value / Gross Property Income

It can be helpful to practice with an example. Let’s say you found a rental property with a list price of $500,000 and based on your estimate, the gross annual income is $80,000. In this case, your GRM is 6.25 (500,000 / 80,000). Then, you’ll continue to make similar calculations with other properties that you’ve identified. You’ll run a gross rent multiplier appraisal and look for properties that have the lowest possible GRMs. (Obviously, you’ll want properties that produce more income. The larger the denominator, the smaller the resulting number will be.)

Keep in mind that the GRM is best used to compare the potential income between properties. It cannot predict how long a specific loan will take to pay off, which property will have fewer expenses, or the amount of debt associated with the purchase of a given property. Each of these factors will need to be considered during a more thorough property analysis.

Using The GRM To Estimate Property Value

GRM can also be used to estimate the property value of an investment you are considering. If you ran the gross rent multiplier formula for a few properties and found an average, you could use that number alongside the annual rental income. Together, these variables would allow you to reverse calculate the property value. This exercise would allow you to compare the market value of a property against its sale price, especially in the event that the purchase price changed. For example, if the GRM is around 7% and the rental income is $75,000 this property value would be $525,000. If that same property is currently listed at $600,000, you could either choose to walk away from the property or conduct a more thorough analysis to negotiate the purchase price in your favor.

What Is A Good Gross Rent Multiplier

A good gross rent multiplier is typically going to be one of the smaller numbers within your range. As I mentioned above, the reason for this is because a lower GRM generally suggests more rental income in relation to the purchase price. That being said, there is not a universally “good” GRM; that definition is always going to have to be established when looking at your specific calculations. What I mean by this is this month you could look at properties with an average GRM of 4 to 5, but next month that number could be between 7 and 8. The gross rent multiplier is all about comparison.

Pros & Cons Of The Gross Rent Multiplier

The gross rent multiplier has several advantages, but there are some drawbacks to take into consideration as well. Keep reading as we pick apart the GRM and what the great advantages and potential downsides are so that you can be mindful when you add it to your investor toolkit.

Pros Of The GRM

The gross rent multiplier equation is a reliable formula for some of today’s best real estate investors, and there are many reasons why. Read through the following benefits to understand why you should add the GRM to your repertoire today:

  • Unique to rental properties: The gross rental multiplier is a formula that is unique to rental property valuation.

  • Quick and easy: The formula is easy to use, and doesn’t require any in-depth calculations or analysis.

  • Rate of return calculator: The GRM in real estate is a way to calculate the rate of return on rental properties.

  • Benchmark several properties at once: Comparing and contrasting multiple rental properties at once would be quite an undertaking, but luckily, this powerful formula allows you to compare more than one property so that you can determine which ones are worth further exploring.

  • Establish a threshold: Once you’ve used the GRM in your analyses several times, you’ll start developing your own threshold for what rate of return you’d find acceptable, and furthermore, you’ll be able to establish a grading system for rental properties.

  • Keep a pulse on a market: Finally, the gross rent multiplier can be a nifty tool to keep a pulse on a rental market. You can calculate the GRM for a few properties within a market, and keep track of whether the GRMs on those properties are increasing or decreasing over time.

Cons Of The GRM

Like with any real estate evaluation, there are potential downsides to using the GRM. However, most of these cons can be mitigated with a little due diligence. Review the following drawbacks to learn more:

  • Easily confused with capitalization rate: Investors can often confuse gross rent multiplier with capitalization rate. The capitalization rate, or cap rate for short, calculates property returns using net operating income, while the gross rent multiplier uses top-line revenue. Some think that cap rate is a better formula because it accounts for all costs, but keep in mind that costs can be manipulated. Read more so that you can better understand the rental property cap rate.

  • Does not consider all costs: As mentioned above, GRM is calculated using top-line revenue, or gross income. This means that it does not factor in any costs of running a rental property, such as operating expenses, vacancy rates, or the cost of insurance or taxes. Here’s a great breakdown for how to quickly estimate rental property expenses.

  • Accuracy not guaranteed: Because the GRM does not account for property costs, some will argue that it does not paint an accurate picture of the return on investment. When you think you’re comparing apples to apples in a certain market, what you don’t know is that one property may have more operating expenses than the other. That’s why it’s good to use the GRM only as an initial screening tool. Always be sure to perform a more in-depth analysis once you’ve narrowed down your search to several properties.

  • May cause you to overlook a good property: If you use a certain tool or calculation as a screening tool, the main danger is the potential to overlook a great property. If you’re quickly filtering through a long list of properties and only looking at certain indicators, you run the risk of skipping over a diamond in the rough just because the initial financials didn’t look good or pass your grading system.

Other Ways To Evaluate Real Estate Investments

When evaluating your real estate investments, it’s always a good idea to have several helpful calculations memorized. You should never rely solely on one type of calculator or benchmark; instead, you should run several sets of calculations so that you can evaluate properties from multiple angles. We already discussed the difference between the GRM and cap rate, which is an investor favorite. There are also indicators such as cash flow, rental yield, and internal rate of return. Be sure to check out our guide that breaks down several rental property calculations you should know.

Summary

The best way to think of the gross rent multiplier is as a grading system. By using consistent variables, investors can quickly compare multiple properties. And, although the GRM doesn’t factor in the costs associated with property ownership, it can still be a great initial, large-scale screening tool. This is particularly important to remember for those who plan on breaking into commercial real estate.

If you ever happen to find yourself at the hands of too many deals, this formula can be a great way to eliminate properties that do not hold much promise. This will leave you with the time (and energy) to closely examine properties that could add more value to your portfolio in the long run.

Can you think of any advantages and drawbacks to using the gross rent multiplier as your initial screening tool when looking at rental properties? Share your thoughts in the section below.

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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies