Gross Rent Multiplier (GRM) is a financial measure that evaluates and compares different investment properties to determine a property’s profitability potential. The GRM formula is used by both novice and experienced investors to determine if a property is worth investing in. The GRM formula is one of the easiest and fastest ways to initially screen potential investment possibilities. In this article, you can use the GRM Calculator, learn what makes a good GRM and how to improve it, explore GRM’s strengths and weaknesses, and learn how GRM differs from other metrics.
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What is Gross Rent Multiplier?
Gross Rent Multiplier (GRM) is a simple calculation used to determine the expected profitability of comparable properties within the same market based on gross annual rental income. Dividing the cost of the building by the gross rent creates a ratio for evaluating and analyzing similar investments in similar markets. In addition, we also estimate payment terms for the unit or property.
Note, however, that GRM does not represent all of your net operating income, so GRM does not represent how long it will take to recoup your investment. And while GRM is a valuable metric, it is just one formula that should be used to determine if an investment is profitable.
Use the calculator below to guide you through the GRM calculation process.
The two variables to enter into the Gross Rent Multiplier Calculator are:
- Property price: the asking price or market price of the property for sale;
- Gross annual rental income: Annual rental income collected before spending
The output will be the Gross Rent Multiplier (GRM).
Please note that this is an estimate as this calculation does not take into account net operating income.
Gross rent multiplier example
To calculate GRM, divide the total purchase price of the property by the annual gross rental income. When determining rental income, do not consider other costs associated with the property, such as taxes, property management fees, and utility bills. However, you should also include any additional income generated in connection with the property, such as parking, storage, laundry, and amenities.
Here is a sample scenario for applying the Gross Rent Multiplier formula:
What good GRM is and how to improve it
GRMs are unique to each housing market, and a city’s GRM may not apply to neighboring areas. Generally, investors should aim to: GRM 4-7. However, low GRM is not always a good opportunity. This means that you may have to invest more money in the property in the long run.
To improve your GRM, increase your current property’s rental income or lower your potential property’s sale price. Raising the rent, adding more units, and adding amenities that attract higher-income renters are all ways to increase rental income. To lower the selling price of a potential investment property, you can either negotiate with the seller or wait until market conditions improve before buying or negotiating.
Common Usage of Gross Rent Multiplier Formula (+ Examples)
The Gross Rent Multiplier formula consists of three variables: Property Price, Gross Annual Rent Income, and GRM. This allows investors to manipulate the variables in the equation and use them in different ways. Expand each accordion below to see the most common ways investors use her GRM formula.
One opportunity to use GRM is to determine the return value of your current investment property relative to other investment properties. To calculate fair GRM within a given area, perform a rental market analysis to find comparable, recently sold properties and see if property values are set too high or too low need to do it.
Look at comparable properties and calculate the GRM for each property to find the average. Suppose the GRM of the neighborhood is about 5. Next, calculate the gross rent multiplier for your property. In this example, let’s say 8. This indicates that your GRM is higher than the surrounding properties, and this is your chance to increase your rent. Rent at fair market value.
GRM calculations can also compare two properties of interest. For example, see Property A and Property B below. These two properties have different rental incomes and very different property prices. Initially, the investor may look at the sticker price and want to proceed with the development of Property A because the cost is much lower. However, considering rental income, Property B has a lower GRM for him. This means Property B is a more valuable opportunity.
Investors should not use GRM alone in pursuing real estate investments. Use GRM to determine which opportunities are better investments, conduct a more detailed financial analysis of your property, and factor in other costs.
If you are selling a property, or considering buying a property that is on the market, you can use the GRM formula to estimate the value of the property. If you have a property’s gross rent multiplier and gross rental income, you can use these numbers to calculate an estimated property value.
Estimated Property Value = Gross Rental Income x Gross Rent Multiplier
example: You are considering the possibility of purchasing a building with 5 units, but the asking rent on the market for a similar building nearby is $2,000 per unit. His GRM for similar properties on the market is 3.5. First, find your gross annual rental income and enter your income and GRM into the estimated property value formula.
- Your gross annual rental income will be: $2,000 x 5 units x 12 months = $120,000
- Enter gross rent ($120,000) and GRM (3.5) into the formula.
$120,000 x 3.5 = Estimated Property Value $420,000
Do the math before you buy your first or next rental property. If your goal is to generate positive monthly cash flow, estimate your rental income before you buy. Use the formula below to estimate your total rental income and determine if you should rent, buy, or abandon your investment.
Estimated Gross Rental Income = Property Price / Gross Rent Multiplier
example: You can reverse engineer the GRM equation to find the estimated rental income. Using the same GRM (3.5) as above gives a potential investment opportunity with a asking price of $400,000 for a 5 unit building. To find your estimated rental income, use the following formula:
- Enter the property value ($400,000) and GRM (3.5) into the equation.
$400,000 / 3.5 = $114,285.71 estimated gross rental income
As an investor, you should calculate your estimated rent compared to what is on the market and see if you can adjust your rent higher to increase profitability.
Advantages and disadvantages of using GRM
There are advantages and disadvantages to using GRM to create a baseline for understanding investment opportunities. While this is an easy-to-use formula for understanding asset value, misusing financial metrics can result in costly decisions and put your investment at risk. After understanding the strengths and weaknesses of this formula, investors can use it to decide how to apply GRM to their investment strategy.
There are several possible reasons why using the GRM calculation may be advantageous or disadvantageous:
Differences in GRM, Cap Rate and Gross Income Multiplier
Given how easily these metrics can be confused, it’s important to understand the differences between the GRM, Cap Rate and Gross Income Multiplier calculation tools. Although the calculations themselves are different, the terms are often used interchangeably. Keep reading to understand the key differences between them and learn which formula is best for assessing a property’s potential return and value.
GRM and cap rate
Both GRM and capitalization rate (cap rate) are used to assess the return and value of real estate, but there are distinct differences between the two. GRM is used to value an income property and determine its value based on the rental income it generates. A cap rate is a percentage value that measures the relationship between an income property’s net operating income (NOI) and its current market value.
The biggest difference is that GRM uses gross rental income, while cap rate includes NOI, which includes operating expenses and vacancy rates. This usually results in a more accurate cap rate, but when an investor is looking at a potential property, they often don’t have all the data to calculate the cap rate, so the GRM can’t estimate. will be your best choice.
Real estate investors around the world use cap rates and GRMs in their real estate analysis, and both are considered valuable techniques for valuing income properties. While these metrics are essential, GRM offers a more efficient way to quickly value investment properties than cap rates or NOI.
To find out your real estate cap rate, use our capitalization rate calculator to see the formula and what it is. This will help you determine if your real estate investment is a good deal.
GRM and Gross Income Multiplier (GIM)
GRM is calculated using the property’s gross rental income. By comparison, the Gross Income Multiplier (GIM) is calculated by dividing a property’s sales price by its total annual income. GIM uses Total Potential Income that considers all sources of income for the property, such as income from parking, vending, and cleaning. In addition, GIM allows investors to easily compare properties of various types and sizes.
However, the GIM only considers the gross annual income of the property. In particular, operating costs such as insurance, property taxes, NOI, and vacancy rates are not considered when valuing properties. These are all key elements of the Gold Standard, the most popular discounted cash flow model used to evaluate potential investment opportunities. For this reason, GIM is best used as a deal screening tool, but cannot be used to create comprehensive valuation models.
If you are a real estate investor considering investment opportunities, use the GRM Calculator to help you make the best financial decisions. GRM is used to determine property values and provides a baseline for investment performance. This should not be used to do a full characterization analysis, but it does provide a quick estimate to help you decide which characteristics to pursue.
Frequently Asked Questions (FAQ)
GRM is an essential technique for determining the profitability of a property compared to other comparable properties in the same property market. When the value of an income property is unknown, GRM can be used to make an educated guess, providing an estimate that real estate investors can use when comparing different properties.
The optimal GRM for rental properties is usually 6-10. If the GRM is high, the property is too expensive. If the GRM is low, the property is undervalued.