What is the Gross Rent Multiplier (GRM)?

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Have you found multiple promising properties at once and wished that there was a quick and dirty way to compare them all at once, without having to do a full analysis? The gross rent multiplier might be exactly what you’ve been looking for. It’s an easy formula that seasoned professionals use to quickly compare and contrast the value of rental properties. Oftentimes, it can be a helpful tool to sort out desirable properties from indesirable properties and determine which ones are worthy of a deeper financial analysis.

Read on for a breakdown of how to use this calculation as well as when it is most effective.

Pros & Cons of the Gross Rent Multiplier

The gross rent multiplier (GRM for short) 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.


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gross rent multiplier formula

Pros

  • 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

  • Easily confused with capitalization rate: Investors can often confuse gross rent multiplier vs cap 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 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, for example. That’s why it’s good to use the GRM only as an initial screening tool. Always be sure to still 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.

Calculating 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 values of properties, and you can even choose between monthly or annual income. When using the gross rent multiplier formula, you’ll just want to make sure to keep the factors consistent across all your calculations. Otherwise, any comparisons you make will be invalid.

Gross Rent Multiplier = Rental Property Value / Gross Property Income

Let’s 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.)

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’s 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. Because you’ll keep in mind that the GRM doesn’t factor in any costs, perhaps you can use it as your initial, large-scale screening tool. Then, once you’ve identified a few properties that hold a lot of promise, then you can whip out your microscope and closely examine factors such as operating expenses, vacancies and rental yield. Either way, you’ll be thanking yourself for knowing how to evaluate properties on the fly and saving yourself an immense amount of time.

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