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Gross Rent Multiplier

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grm

Gross rent multiplier (or GRM) is a measurement of property value based upon each $1 of its annual rental income before operating expenses; namely, the ratio between a real estate investment property's market value and its gross scheduled income.

Although not a particularly powerful measurement because it doesn't account for the cost of factors such as utilities, taxes, maintenance and vacancies as well as ignoring the time value of money, GRM does provide real estate investors with a quick way to conduct a preliminary survey of comparable investments because it's an easy ratio to calculate.

Formulation

Gross Rent Multiplier = Market Value / Gross Scheduled Income

Where,

  • Market value represents the price of the property. This can either be what the investment has recently sold for or what it's currently offered for sale at depending on the objective of your survey.
  • Gross scheduled income (or GSI) is the total annual rental income the property is capable of generating at full occupancy; in other words, the potential rental income available based upon zero vacant units.

The calculation requires two steps.

First, you must determine the rental property's market value. This is fairly straightforward because it represents either the price a comparable investment property has recently sold for or what it is currently listed for sale at.

For instance, when your objective is to make a comparison between similar sold rental properties, you use the price that those properties sold for as their market value in your GRM calculation. Likewise, when comparing similar listed-for-sale rental properties, you would use their listing price in the calculation.

Secondly, you must calculate the property's gross scheduled income. In this case, you will have to conduct a rent survey so you know what amount to apply to any vacant units currently present in the property.

For instance, say a real estate investment consists of eight occupied units and two vacant units. Since GSI represents the property's potential annual rental income, you will have to also apply a monthly rent to cover the vacancies; which is commonly the fair market rent (though it can be whatever rent you choose).

If the occupied units illustrated above, for example, are currently collecting $1,000 monthly and you decide to apply the fair market rent that your research shows to be $1,050 monthly, you will compute the property's GSI this way:

Current annual rental income + potential annual rental income, or, $96,000 + $25,000 = $121,000.

Okay, let's put it all together.

If the rental income property you're looking at has a market value of (say) $800,000 and a gross scheduled income of $121,000 as illustrated above, the gross rent multiplier would be 800,000 / 121,000, or 6.61.

Rule-of-Thumb

A higher GRM signifies a higher property market value to GSI ratio and therefore favors the seller; likewise, the reverse is true. A lower gross rent multiplier signifies a lower property market value to gross scheduled income ratio and favors the buyer.

If it helps drive home the point, you might also consider it this way. Gross rent multiplier indicates the number of years it would take for the rental income used in the computation to equal the property's price.

So You Know

The gross rent multiplier is just one of 55 calculations you can make quickly and easily with ProAPOD's iCalculator online real estate calculator. Preview the sample...

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James Kobzeff has over thirty years experience as a realtor specializing in real estate investing and investment property. He freely shares his knowledge to help others. He is the developer of ProAPOD real estate investment analysis software solutions.