Commercial Mortgage Quick Reference Guide
Gross Rent Multiplier (GRM) in Relation to Multifamily Lonas
A property’s Gross Rent Multiplier, or GRM, is one of the best ways to quickly calculate its profitability compared to similar properties in the same real estate market. Another variant of GRM is Gross Income Multiplier (GIM), which is used when a calculation also incorporates non-rental sources of income, such as vending machines or coin-laundry machines.
What is the Gross Rent Multiplier Formula?
The formula to calculate GRM is:
Gross Rent Multiplier = Property Price / Gross Rental Income
So, for example, if a property is selling for $2,000,000 and it produces a Gross Rental Income of $320,000, the GRM would be:
$2,000,000/$320,000 = 6.25
What Does Gross Rent Multiplier Mean In Practice?
In the example above, we determine that the property would have a GRM of 6.25. Out of context, that means practically nothing. However, if we were to find out that most other similar properties in the area had GRMs of 8-9, the fact that the property in question has a GRM of 6.25 could make it a profitable investment.
GRM can also be used to estimate the value of an income-producing property when it’s value is not known. For instance, if we know that a property produces about $100,000 of income per year, and the average GRM of similar properties in the area is about 7, we could multiple the two ($100,000 * 7) to create an estimated property value of $700,000. While this is by no means an exact calculation, it can provide a workable estimate for a property investor to use when comparing a variety of properties.
Finally, if you know what the value of a property is, and you know the average GRM for properties in the area, you can use the Gross Rent Multiplier formula to calculate the expected rent for the property. So, for instance, if a property is valued at $850,000, and the average GRM in the area is 8, you could divide the property value by the average area GRM to determine expected rental income.
In doing this calculation, we come up with the amount of $106,250. If the actual rental income of the property greatly exceeds this, it is likely to be a good investment, while if it is significantly less than this, it is not likely a good investment— or, at the very least, it is less profitable than other similar properties in the area.
When assessing an property for it's suitability for a multifamily loan, lenders will look at its GRM in comparison to similar local properties in order to determine the chance that a borrower will be able to effectively pay back their loan.
Gross Rent Multiplier vs. Cap Rate
Gross Rent Multiplier is often compared and contrasted with a similar property valuation metric known as capitalization rate, or cap rate. A property’s cap rate is calculated by taking its net operating income (NOI) and dividing it by the property’s current market value. Unlike GRM, cap rate incorporates vacancies and operating expenses, which makes potentially far more accurate than GRM. However, when attempting to quickly estimate and compare the profitability of multiple properties, investors may not have detailed occupancy or expense information on hand, which can make GRM a more efficient method to quickly evaluate investment properties.