The gross rent multiplier (GRM) gives real estate investors a way to determine the value of a property and compare it to other rental properties on the market. Although there are limits to what the GRM can tell you, it’s still a good way to do a basic assessment of a property.
If the GRM is too high compared to other properties in the same area, it could indicate the property isn’t a good investment.
What Is Gross Rent Multiplier?
The gross rent multiplier (GRM) is a tool investors use to evaluate an investment property by looking at the potential rental income. GRM is expressed as a ratio of the current market value or sale price of the rental property and the annual gross rental income for easy comparison between comparable properties.
GRM helps real estate investors calculate how profitable different rental properties may be based on their gross annual rental income. It’s a helpful formula to use when the market is changing quickly, in addition to looking at fair market comparables.
So now that you understand what GRM is, how do you put it to practical use? Let’s look at the formula for calculating GRM and how to know what a good gross rent multiplier is.
How To Calculate Gross Rent Multiplier
Here’s the formula you’ll use to calculate the gross rent multiplier:
Gross Rent Multiplier = Property Price (or current market value) / Gross Rental Income
Let’s say you’re considering investing in a multifamily property but want to know the GRM first. The property price is $2 million, and the gross rental income is $350,000, giving you a GRM of 5.71. In general, a lower GRM will bring in more income over time.
Of course, in some scenarios, you may not know the property’s estimated annual gross rental income. In this situation, you’d need to do more research and see what comparable properties are charging for rent.
What Is A Good Gross Rent Multiplier?
A good gross rent multiplier is usually between four and seven, as this indicates the property is well-priced. If the GRM is too high, that indicates the seller is asking too much for the property. In the example above, the GRM would be considered good, since it falls in that range.
Is GRM Different From Cap Rate?
Yes, the GRM and capitalization rate are two different tools used in real estate valuations. The GRM is used to estimate the value of an income-producing property based on the gross rental income. It’s a simple way to compare the income potential of several different properties but doesn’t consider the expenses, financing costs or vacancy rates that may come with the property.
The cap rate is also used to determine the potential return on investment (ROI) of a property, but it does this by dividing the net operating income (NOI) by its current market value (or sale price). And a high cap rate suggests a higher return on investment. Since the cap rate considers both the income generated by a property and its operating expenses, it’s a more comprehensive way to measure profitability.
The Bottom Line
The gross rent multiplier provides an easy way to compare multiple properties. It can help you understand whether that property is a good investment or whether you should keep looking.
However, the GRM is only a starting point since it doesn’t consider the operating expenses and should be used alongside other investing tools. If you’re interested in investing in rental properties, you can get started by applying for a mortgage today.
Gross rent multiplier (GRM) is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, and utilities; GRM is the number of years the property would take to pay for itself in gross received rent.
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(GRM) is a tool investors use to evaluate an investment property by looking at the potential rental income. GRM is expressed as a ratio of the current market value or sale price of the rental property and the annual gross rental income for easy comparison between comparable properties.
It is calculated by dividing the sale price of a property by its annual gross rental income. A higher GRM indicates that the property is overpriced, while a lower GRM indicates that the property is underpriced. The best GRM is usually considered to be between 4 and 7.
The GRM functions as the ratio of the property's market value over its annual gross rental income. Keep in mind that GRM isn't equivalent to the length of time it takes for the investment to pay off because it doesn't include the full net operating income (NOI).
For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price. If you want to buy an investment property, the 1% rule can be a helpful tool for finding the right property to achieve your investment goals.
Multiplying the GIM by the property's gross annual income yields the property's value or the price for which it should be sold. A low gross income multiplier means that a property may be a more attractive investment because the gross income it generates is much higher than its market value.
When you sign a lease, you agree to pay a certain amount each month, and the combined amount of all monthly rental payments is your annual gross rent. For instance, if your monthly rent is $2,000 and you have a one-year lease, your annual gross rent would be $24,000.
There are some downsides to using GRM: It does not take into account operating expenses, which could play a significant role in the overall profitability of any property. A property with a high level of operating expenses may not be as profitable.
What is GRM vs GIM? The gross income multiplier (GIM) is very similar to the GRM, except that it takes into account all of the income generated by a property, not just the rent. This includes things like laundry income, parking income, and any other miscellaneous revenue.
A good gross rent multiplier is usually between four and seven, as this indicates the property is well-priced. If the GRM is too high, that indicates the seller is asking too much for the property. In the example above, the GRM would be considered good, since it falls in that range.
Calculate the gross rental income: Estimate the property's gross rental income by dividing the fair market value price by the GRM. Calculate the operating expenses: Whereas ROI considers the operating expenses of the investment, GRM does not.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
Effective gross income is calculated by adding the potential gross rental income with other income and subtracting vacancy and credit costs of a rental property. EGI is key in determining the value of a rental property and the true positive cash flow it can produce.
Explanation: The gross monthly rent multiplier (GRM) method is most appropriate for an apartment building with five units. This method is generally used for income properties of 1-4 residential units. It compares the price of the property to its potential rental income.
In terms of what constitutes a 'good' gross yield in real estate, anything between 7-8% is considered ideal. A gross yield of 8% means that 8% of the cost of the property will be recouped in rent every year (before expenses).
Introduction: My name is Kelle Weber, I am a magnificent, enchanting, fair, joyous, light, determined, joyous person who loves writing and wants to share my knowledge and understanding with you.
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