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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.
What is The Gross Rent Multiplier?
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.
How to Calculate Gross Rent Multiplier
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.
Gross rent multiplier formula
Market Value/Gross Rental Income=Gross Rent Multiplier
Example:
- 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.
Annual or monthly GRM?
Most investors use annual rent, as in the example above. Some use monthly rent, which produces a figure 12 times higher. Either works, as long as you use the same version for every property you compare.
What is a good gross rent multiplier?
A high GRM isn't automatically a bad deal: in expensive, in-demand areas, prices sit high relative to rents, but those properties often appreciate faster.
Lower does tend to be better - a lower GRM means you pay less for each dollar of rent. But there's no national "good" number. The often-quoted range of 4 to 7 is hard to find in most US cities today, where double-digit GRMs are common because prices have risen faster than rents. Judge a GRM against recent sales of similar properties in the same neighborhood, not against a rule of thumb.
A GRM that's far out of line with the comps is worth investigating either way. Well above the comps can mean the property is overpriced. Well below can mean the rent isn't sustainable, the property needs work, or operating costs are unusually high.
GRM vs Cap Rate
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.
How to Use Gross Rent Multiplier
As well as highlighting profitable investment opportunities, the GRM calculation can also be rearranged and used in other ways:
- Use it to compare with other properties to find a profitable investment opportunity e.g. Gross Rent Multiplier = Property Price / Gross Rental Income
- Rearrange the formula to estimate the fair market value of a property e.g. Property Value = Gross Rental Income x Gross Rent Multiplier
- Use it to calculate the gross rental income e.g. Gross Rental Income = Property Price / Gross Rent Multiplier
Worked example: using GRM to set an offer price
You're looking at a duplex listed at $425,000. Each unit rents for $1,300 a month, so annual gross rent is $31,200. Three similar duplexes in the same neighborhood sold recently:
The listing's own GRM is $425,000 ÷ $31,200 = 13.6, well above the comps. Apply the comps' average to the listing's rent to estimate a fair value:
Estimated value = GRM × annual gross rent = 12.0 × $31,200 = $374,400
That gives you a starting point for an offer about $50,000 below the asking price. Before you rely on it, check why the seller is asking more: an updated property or lower operating costs could justify part of the gap. GRM won't show either.
Watch how GRM changes in your market
Track the average GRM of recent sales in your area over time. A rising GRM means prices are climbing faster than rents, so yields are shrinking and returns depend more on appreciation. A falling GRM means rents are catching up with prices, which usually improves cash flow on new purchases.
Advantages 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:
- It’s a quick and easy calculation that uses readily available information
- Good comparison tool
- Considers rental income so is more meaningful than property price to landlords
- Can be used by beginner and accomplished investors alike
Disadvantages of Gross Rent Multiplier
- Doesn’t take expenses and operating costs into account
- Only relevant when comparing similar property types in the same market
- Vacancies aren’t considered
- Assumes rent stays the same. It doesn't account for rent growth, rent control or a lease that's below market
- Uses asking or contract rent. If units are vacant or rents are above market, the GRM will flatter the property
Final Words
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.