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Investment Strategy, Rental Accounting

What Is The Gross Rent Multiplier? (and Why Should You Care?)

The gross rent multiplier (GRM) is easily calculated and gives an excellent quick first value assessment. The GRM essentially tells you whether or not the property is likely to be profitable and is thus a good investment.

However, it isn’t a very precise tool for getting a true value. The gross rent multiplier should be used to determine if a further and more valuable assessment of the property is worthwhile.

If the GRM is too high or low compared with recently sold comparable real estate it indicates a problem with the property or gross over-pricing

Why the GRM Matters

Investors who are actively looking for that next rental property investment will likely have more than one on their radar. They might even look at dozens before making an offer. Instead of combing through precise numbers, doing time-consuming and in-depth research on every property, they can do a quick assessment and make a judgment on whether further input of time and resources is worthwhile.

The gross rent multiplier then, should focus an investors efforts allowing them more time to do deeper analysis of the best options. It’s worth noting that even after calculating the GRM and finding it isn’t great you might continue your research of this property because of other uncalculated factors.

How to Calculate Gross Rent Multiplier

To calculate the GRM of a property you need two numbers. First, the Current Market Value, and second the Annual Gross Income of that property. You can normally find the market value on the property listing, by talking to the real estate agent, or by comparing the property to like properties in the area through a property listing site like Zillow.

For annual gross income, you can either look at the monthly rent amount of like properties in the neighborhood or ask the current owner for a copy of their rent roll if it’s currently being rented out.

The equation to calculate GRM is:

Market Value / Annual Gross Income = Gross Rent Multiplier

Example:

  • The property value is $500,000
  • The monthly gross income is $3,000 per month, meaning $36,000 annually.
  • The GRM in this scenario would be $500,000 / $36,000 = 13.9

What is an Acceptable GRM?

An acceptable gross rent multiplier depends on the local market and comparable properties. But, typically, the lower the GRM the less time it will take for you to pay off the property, ie. the more profit you’ll have.

Typically, a good GRM is between 4 and 7. Anything above and you will begin to struggle with profitability, anything below and you have to worry about whether you will actually get that rental income.

As we mentioned before this is heavily dependent on location. For example, if you invested in a property in San Francisco or another expensive city, you will likely have to contend with high GRMs due to the higher property costs. It’s also worth noting that property in a desirable area, while it might come with a higher GRM, will also likely appreciate faster

How to Use GRM to Estimate Property Value

You might have analyzed properties in the area and found that their GRMs averaged around 6.5. You are now looking at another property, to determine if the for sale price is a good deal or not, you can use the GRM average and the Annual Income to determine how much you are willing to pay for the property.

GRM (6.5) x Annual Income ($36,000) = Market Value ($234,000)

If the property was on the market for $500,000, as in the example used before, then you would probably just walk away from this deal.

Final Thoughts

Lenders consider the profitability of an asset as one of the most important qualification criteria for financing. While the GRM doesn’t impart a huge amount of information, it does offer an easy and fast way to determine whether or not a deal is worth pursuing.

It can also be used to determine the upper limit of what you should be willing to pay for a property which can save you from overpaying for a property.

As a final note, for any property or deal you do chase, it’s important to do your due diligence thoroughly. The GRM is a starting point, but there are numerous, and much more valuable calculations to consider before making your final decisions.

Investment StrategyLandlord Accounting

Ben Luxon

Ben is the editor and lead writer for Landlord Studio. He has worked with real estate professionals all over the world and written educational articles on tech, real estate, and financial growth for sites such as Forbes, TechBullion, and Business Magazine.

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