The Gross Rent Multiplier Method and Calculation
The gross rent multiplier (GRM) is a simple measurement real estate analysts use to estimate the market value of rental income property. What is it? Gross rent multiplier is the ratio between a rental property's gross scheduled income and its market value. In other words, a GRM of "X" is the same as saying that the property value is "X times" its annual gross income.
- Pros GRM is very easy to calculate and provides real estate investors a quick way to conduct a preliminary survey of comparable investments.
- Cons GRM is not a particularly powerful measurement because it doesn't account for the cost of factors such as utilities, taxes, maintenance and vacancies nor the time value of money.
Gross Rent Multiplier = Market Value / Gross Scheduled Income
Market Value = Gross Rent Multiplier x Gross Scheduled Income
Let's say you want to determine how well the asking price for the 8-unit income property you have an interest in buying stacks up to the prices that two similar-type properties recently sold for in the area. And from your calculations, you discover that each of those properties had a GRM of 8.3 and 8.5.
Here's what you do.
Divide the subject property's asking price (say $640,000) by its gross scheduled income (say $80,000) in order to compute its gross rent multiplier.
$640,000 ÷ 80,000 = 8.0
Okay, so what does that tell you? Namely, that the rental income property you are interested in is priced slightly lower than those two other rental income-producing properties that sold recently. How do we know that? Because its value is just "8 times" its annual rental income compared to "8.3 times" or "8.5 times" the other two properties were priced at.
Here's the idea.
- As a buyer, you want the lowest GRM possible
- As a seller, you want the highest GRM possible
- 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.
Rule of Thumb
There is no universally correct number because GRM is market driven. So "X" in one market might indicate a favorable real estate investment opportunity and unfavorable in another. Moreover, bear in mind that the measurement, to have any value at all, must be computed on reliable income data.
So You Know
Gross Rent Multiplier is just one of a wide-range of returns automatically computed in ProAPOD's Agent 6 and Executive 10 real estate investment software solutions as well as its online iCalculator real estate calculators.