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What Is the Gross Rent Multiplier?
While it is important to examine a property and market based on several factors in order to make a more informed investment decision, using the Gross Rent Multiplier metric (GRM) can provide a quick, but rough idea of the value and profitability of an investment property in a specific market. As the GRM is calculated solely by dividing the price of the property by its gross rental income, this metric is mostly used to screen a market by comparing similar properties within an area.
The Gross Rent Multiplier Formula
GRM = Property Price ÷ Annual Gross Rental Income
If a property is valued at $7,000,000 and produces $850,000 in rent annually, the GRM is 8.23. Some real estate analysts believe that the GRM metric can be a good indicator of the time it takes to pay off a property, however, that is not accurate — considering that the GRM doesn’t take into account other key factors, such as the Net Operating Income (NOI). Even so, this number can be used to get a rough idea of how profitable an investment could be.
Gross Rent Multiplier Calculator
Understanding the Gross Rent Multiplier Metric
As a general guide, the lower the GRM, the more profitable is the investment. This number usually varies depending on the market and other factors, including the market cycle. It’s also best to only compare multifamily properties with similar ratings. For example, comparing a Class C asset to a Class A one, will most definitely not provide accurate insight into how profitable a property might be. It’s best to use GRM to examine mostly similar properties in similar conditions in similar markets, according to a blog post from Trion Properties.
To sum up, the GRM is a useful tool for investors to quickly determine the value of an investment property in a specific market, however, it shouldn’t be the only metric used to make an investment decision. To create a full picture of how lucrative an investment might be, it’s important to consider various factors, such as operating costs, the age and quality of the property, taxes, maintenance, or vacancies. Nonetheless, using the GRM can help determine whether an investment opportunity is worth further investigation.