The gross rent multiplier formula is a useful tool for analysing investment properties for beginner and experienced real estate investors.
From cash flow to occupancy rates, there are a number of metrics that can be used to help you effectively scale your property portfolio. Gross rent multiplier (GRM) is one metric that can help you determine whether or not a real estate investment is worth pursuing.
Given that the gross rent multiplier formula is useful to both beginner and career real estate investors, it’s worth knowing how to use it to your advantage, wherever you are in your real estate journey.
GRM, also known as the Gross Income Method, is a financial metric used to determine the potential profitability of a property. If you’re looking to invest in a particular market but are struggling to narrow down the list of options available to you, GRM can be a valuable screening tool.
The results of the calculation are relative to other results, so GRM should be used as a comparison tool between more than one property. When calculated on a number of similar buildings in the same market area, it can reveal which income-producing property is worth the most, in terms of rental returns.
Whether or not the GRM of a property can be considered good, is dependent on the local market and comparable properties. For example, comparing the GRM of a single-family home in rural Arizona with a multifamily block of 60 units in Chicago will not give you a relevant result, as the buildings and markets are vastly different. Instead, use the gross rent multiplier formula to analyze a selection of similar investment opportunities in a particular market.
GRM is calculated by taking the property price and dividing it by the gross rental income.
The market value of the property can be found on the property listing itself, by asking the real estate agent, or by estimating it based on other similar properties for sale in the area.
If you are calculating GRM for a property you already own, you can use the current gross rental income. If it’s a property you are looking to acquire, ask the current owner for a copy of a current rent roll report.
Market Value/Gross Rental Income=Gross Rent Multiplier
Market Value: $300,000
Gross Income: $24,000
GRM: $300,000 / $24,000 = 12.5
Once you have the GRM for one property, you should repeat the calculation on at least one other similar property, in order to compare and rank them.
Typically, a GRM of 4-7 is seen as desirable. The lower the GRM, the more potentially lucrative the deal, as this means it will take less time for the rental income to offset the investment. Keep in mind though that the results vary significantly depending on the location, market, and other similar properties.
While GRM uses gross income to determine a property’s profitability, the capitalization rate (cap rate) takes the net operating income (NOI) into account. The cap rate varies in comparison with the GRM as it considers the property’s operational expenses and vacancy rate.
Although using the cap rate gives you a more reliable measure of a property’s performance, because it is difficult to determine the operating expenses of a property you do not already own, it can be challenging to calculate accurately. If you are unable to measure the NOI, GRM remains a quick and easy tool to use to evaluate potential investments.
As well as highlighting profitable investment opportunities, the GRM calculation can also be rearranged and used in other ways:
Gross Rent Multiplier = Property Price / Gross Rental Income
Property Value = Gross Rental Income x Gross Rent Multiplier
Gross Rental Income = Property Price / Gross Rent Multiplier
Bear in mind that as is the case with almost any financial metric, GRM is not a foolproof way to determine a good investment from a bad one. Real estate investing is multifaceted, so simple numbers won’t address all of the nuances. Nonetheless, GRM is a useful screening tool to consider in your property investing checklist and has many advantages:
Some advantages of GRM are:
Disadvantages of GRM are:
Using the gross rent multiplier formula can help you decide whether a property you have your eye on is worth investing in. The calculation does have its limitations but remains useful when used in context alongside other financial metrics and calculators.
In order to stay on top of your finances for accurate financial analysis investors should employ the right software to help them track income and expenses, equity, loans, and depreciation. Landlord Studio is the top rated property management and accounting software used by thousands of landlords worldwide.