Gross Rent Multiplier: A Quick Way to Compare Multifamily Property Prices
Gross Rent Multiplier (GRM) is the ratio between a rental property's gross scheduled income and its market value that is so easy to compute it provides you with a quick and simple way to measure and compare rental income property prices on the fly prior to doing a more serious analysis.
For instance, the gross rent multiplier can help when you're just trying to do a rudimentary evaluation of several multifamily properties to see which sale price might be the best financial deal; or maybe when you're trying to arrive at a market price for a property based upon previous sales for similar properties.
In this article we'll look at the two methods for gross rent multiplier commonly used by analysts quickly comparing rental income property prices.
In this case, it's simply calculating the GRM for a property and comparing it to the GRM of other income properties that have recently sold or currently for sale in the area.
Let's say a duplex is currently listed for $500,000 and generates gross annual rents of $65,000 and you want to know the gross rent multiplier to see whether the asking price is in line with other similar-type rental properties that may have been sold in the local market recently.
= Gross Rent Multiplier
$500,000 ÷ 65,000 =
Okay, now you check at what GRM the other properties sold and make a comparison. The premise is fairly straight forward: the ratio between the gross scheduled income and price should be fairly close between the subject property and those that recently sold.
In this case, we'll transpose the equation to determine a market sale price.
Let's say you're thinking of listing your 8-unit income property for sale and want to get an idea what the asking price should be so it's inline with the market. Your property generates $160,000 annual rental income, and based upon your research you discover that other properties have sold at a gross rent multiplier of about 7.0.
= Market Value
$160,000 X 7.0 =
Market value: $1,120,000
Okay, now you have a preliminary idea of how much to ask for your apartments. Yes, it's just a precursor to a more serious analysis, but it helps you get started.
How to Interpret the GRM
Since it's the ratio between a rental property's gross scheduled income and its market value, if GRM is equal to "X", then the rental property's value is "X" times its annual gross income. Therefore, think of it this way:
- 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." Therefore, it just makes sense that a buyer would desire less years than a seller.
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 included in these ProAPOD solutions: