Anyone who has been actively engaged in real estate investing is surely already acquainted with gross rent multiplier because it does provide somewhat of a rental property value estimate commonly required by real estate investors.
On the other hand, novice real estate investors might not understand this estimate of rental property value and the role it plays to investors and analysts engaged in the investment real estate process.
In this article we’ll consider gross rent multiplier (GRM) – including the definition, formula and some pros and cons – so real estate investing beginners can get a decent understanding about what it is and how to implement it.
Gross Rent Multiplier
GRM represents the ratio between a rental property’s price and its gross scheduled income (annual rental income from all units) – therefore telling the investor what the property price is based upon each $1 of its annual gross rental income potential.
In other words, it tells the investor that if the building was fully-occupied – without vacancies – that the price for the property would be equal to the multiplier times that annual amount of rental income.
For example, an income property with a GRM of 6.0 would indicate that the property’s price is six times its gross scheduled income; therefore the property would have to generate an annual income (fully-occupied) for six years in order to equal its price.
Of course, it’s never likely to expect that an income-producing property has zero vacancies. So in this case you would use the current rents for the number of occupied units and an estimate of market rents for the number of vacant units multiplied by twelve months to compute gross scheduled income (GSI).
Number of Occupied Units x Current Rents x 12
+ Number of Vacant Units x Market Rent x 12
= Gross Scheduled Income
Gross Rent Multiplier = Sale Price / Gross Scheduled Income
Pros & Cons
GRM has the advantage of being a very easy ratio to calculate and therefore can be a rule of thumb measurement that does offer real estate agents and investors a quick method to do a preliminary survey for real estate investing purposes.
On the other hand, gross rent multiplier is not a particularly powerful measurement and is best used as a precursor to a serious income property analysis.
Rule of Thumb
The higher the GRM, the more years it would take for annual rental income to equal price. Therefore this is favorable to sellers because it means the sale price is higher in proportion to the gross scheduled income.
The lower the GRM, the less years it would take for rental rental income to equal price. Therefore this is favorable to buyers because it means that the sale price is lower in proportion to the gross scheduled income.
So You Know
All ProAPOD real estate investment software solutions automatically calculate and include GRM in the appropriate real estate analysis and marketing reports.