Gross Rent Multiplier (GRM): Calculator, Property Evaluation, Alternatives
Gross rent multipliers are not a perfect measure, but they offer a great way to compare investments. Find out more in our comprehensive guide.
- What is the Gross Rent Multiplier Formula?
- GRM Calculator
- Is Your GRM Too High or Too Low?
- How to Improve Your Gross Rent Multiplier (GRM)
- Gross Rent Multiplier (GRM) in Relation to Multifamily Loans
- What Is a Good GRM?
- What Does Gross Rent Multiplier Mean in Practice?
- Gross Rent Multipliers vs. Cap Rates
- Related Questions
- Get Financing
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 million and it produces a Gross Rental Income of $320,000, the GRM would be:
$2,000,000 ÷ $320,000 = 6.25
GRM Calculator
Is Your GRM Too High or Too Low?
The Gross Rent Multiplier (GRM) is an important metric used in commercial real estate to determine the value of a property. It is calculated by dividing the sale price of a property by its annual gross rental income.
A higher GRM indicates that the property is overpriced, while a lower GRM indicates that the property is underpriced. The best GRM is usually considered to be between 4 and 7.
How to Improve Your Gross Rent Multiplier (GRM)
Improving the Gross Rent Multiplier (GRM) of a property can be done by increasing the rental income or decreasing the sale price. Increasing the rental income can be done by raising the rent, adding additional units, or adding amenities that will attract higher paying tenants. Decreasing the sale price can be done by negotiating with the seller or by waiting for the market to improve.
It is important to note that the GRM is only one metric used to evaluate a property and should not be used as the sole factor in making an investment decision. Other factors such as cash flow, cap rate, and debt service coverage ratio should also be taken into consideration.
Gross Rent Multiplier (GRM) in Relation to Multifamily Loans
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 a Good GRM?
As you know, a lower GRM is best, as it indicates a higher return on investment. That said, the ideal GRM for multifamily properties can vary depending on the location and local real estate market. A GRM between 4 and 7 is ideal, as we previously mentioned, but it's important to compare it to other investments in the same area.
For example, let's say a multifamily property is listed for $500,000 and has an annual gross rental income of $70,000. To calculate the GRM, divide the property's price by its gross annual rental income:
$500,000 ÷ $70,000 = 7.14.
While this GRM falls outside the ideal range of 4 to 7, this doesn't necessarily mean it's a bad investment. It's important to note that the GRM is just one factor to consider when evaluating a rental property. Other factors such as operating expenses, vacancy rates, and potential for appreciation should also be taken into account.
Additionally, the GRM should be compared to other rental properties in the same area to ensure it's a competitive investment. For instance, if similar properties in the area have a lower GRM, it may not be the best investment choice.
What Does Gross Rent Multiplier Mean in Practice?
In addition to evaluating investments, we can also use GRM to estimate the value of an investment property if it isn't listed. 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 multiply the two ($100,000 x 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 Income 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.
$850,000 ÷ 8 = $106,250
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 a property for its suitability for an apartment 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 Multipliers vs. Cap Rates
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, the cap rate incorporates vacancies and operating expenses, which makes it 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.
Gross Rent Multiplier | Cap Rate |
|---|---|
A measure of the value of a rental property that is calculated by dividing the property's purchase price by its gross annual rental income. | A measure of the return on investment for a rental property that is calculated by dividing the property's net operating income (NOI) by its current market value. |
Can be used to quickly compare the relative value of different rental properties without taking into account expenses or vacancies. | Takes into account expenses and vacancies, making it a more accurate measure of profitability than GRM. |
Related Questions
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.
Why GRM is important?
- GRM is one of the best ways to quickly calculate the profitability of a property compared to similar properties in the same real estate market. It can also be used to estimate the value of an income-producing property when it’s value is not known, and it can provide a workable estimate for a property investor to use when comparing a variety of properties.
What is considered a good GRM for a rental property?
- The best GRM is usually considered to be between 6 and 10. A higher GRM indicates that the property is overpriced, while a lower GRM indicates that the property is underpriced.
How to Improve Your Gross Rent Multiplier (GRM)?
- Improving the Gross Rent Multiplier (GRM) of a property can be done by increasing the rental income or decreasing the sale price. Increasing the rental income can be done by raising the rent, adding additional units, or adding amenities that will attract higher paying tenants. Decreasing the sale price can be done by negotiating with the seller or by waiting for the market to improve.