What is a gross rent multiplier? |Why is the GRM important? |How to calculate the GRM | What is a good GRM? | Pros & cons of the GRM | Gross rent multiplier vs. cap rate

Have you ever found multiple promising properties at once? Wished for a quick and easy way to compare them without having to run a full analysis? The gross rent multiplier (GRM) might be exactly what you’ve been looking for.
reference.com
It’s a simple formula that investors use to compare and contrast rental property values, and it can help sort desirable properties from less profitable counterparts. You can use GRM as a preliminary filter to determine which properties are worthy of a deeper financial analysis.

Read on for a breakdown of how to use the gross rent multiplier and why it’s a great tool in real estate.

What Is A Gross Rent Multiplier (GRM)?

The 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 conducting a complete 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 GRM is not to be used in place of thorough property analyses. Instead, it is best used to eliminate properties before performing in-depth analyses of promising candidates.

Why Is The GRM Important In Real Estate?

The GRM is important to real estate investors because of its speed and utility. The formula utilizes two variables: rental property value and gross property income. There are several formulas in real estate investing, but almost none are as simple as the GRM. Investors typically have access to both numbers and can easily perform this calculation. 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 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.

Gross Rent Multiplier Formula

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 property appraisal value. 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 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 with 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 purchasing 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 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 if 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. Suppose that same property is currently listed at $600,000. In that case, you could either choose to walk away from the property or conduct a more thorough analysis to negotiate the purchase price in your favor.

How To Use GRM In Real Estate Investments

Let’s take a look at how a real estate investor would use GRM.

First, gather a list of prospective properties you’re interested in. Be sure you know the rental property value and gross property income for each of them. Then, calculate the GRM for each property using the provided formula.

Let’s say that one property has a GRM of 7, while the other two properties in the same area have a GRM of 9 and 10. The property with the GRM of 7 preliminarily appears to be the most profitable opportunity. You would proceed with a deep analysis of this property to decide if it’s a worthy investment.

More Examples Of GRM In Real Estate

The GRM formula is made up of three variables: Gross Rent Multiplier, Rental Property Value, and Gross Property Income.

You don’t always have to use this formula to calculate GRM. If you know two out of the three variables, you can calculate any of the variables in the formula.

For instance, you can reverse-engineer the formula to calculate gross rental income. Let’s say that the average GRM in a neighborhood is 6, and the asking price of the property is $300,000. You can deduce that the gross rental income is $50,000. This is how the calculation is made:

- Gross Rent Multiplier = Rental Property Value / Gross Rental Income

- Gross Rental Income = Rental Property Value / Gross Rent Multiplier

- Gross Rental Income = $300,000 / 6

- Gross Rental Income = $50,000

Manipulating these formulas allows investors to analyze properties quickly before they zero in on one or two promising candidates.

What Is A Good Gross Rent Multiplier?

A good gross rent multiplier in real estate is typically one of the smaller numbers within your range. As I mentioned above, 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