The gross rent multiplier (GRM) is a measure used by real estate professionals to evaluate the profitability of rental properties. It is calculated by dividing the sale price by potential rental income and can be used to compare properties in the same area. A lower GRM indicates higher earning potential, but it has limitations and does not account for operating expenses or vacancies. It can also be used in reverse to estimate the fair value of a rental property.
The gross rent multiplier is a measure used by real estate professionals to judge the profitability of income-producing rental properties. It is calculated by taking the sale price of the property and dividing it by the potential rental income of the property. This value can be calculated on a monthly or yearly basis and is used to evaluate properties in an area against those in the same area. When comparing the Gross Rent Multiplier, or GRM, of two properties, the property with the lower GRM has more earning potential.
Investors in real estate need to know if they are getting good value from the capital they invest in properties. As such, they need some sort of determining factor to decide on the relative value of properties in the same area. While it does have some limitations, the gross rent multiplier is a good measure because it gives investors a quick idea of how profitable a specific rental property may be.
As an example of how to calculate the gross rent multiplier, imagine that a real estate investor is targeting an apartment building that has a sales price of $400,000 US dollars (USD). For that property, the income that would be earned in a single month if all rooms were occupied, also known as the gross rental income, is $8,000. To calculate the GRM, the $8,000 USD is divided into the $400,000 USD. The resulting value of 50 is the monthly GRM for that property.
Taken at face value, the gross rent multiplier is a quick way to judge properties in the same area against each other. A property with a lower GRM than another property could be considered the more profitable of the two. However, there are limitations to this quick trial. For example, GRM does not account for the different operating expenses of different properties, nor does it account for vacancy totals in the equation. Both issues could significantly affect profitability.
Used in reverse, the gross rent multiplier can help an investor judge the fair value of a rental property. For example, imagine that the potential gross rental income for a property for one month is $5,000 USD, and the average GRM for properties in the surrounding area is 60. An investor can reverse the GRM equation and multiply 60 by $5,000 USD , coming to $300,000 USD. Therefore, $300,000 is an estimate of the property’s value, and the investor can judge this total against the seller’s asking price to see if the property is worth buying.
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