The gross rent multiplier (GRM) is one way agents, real estate investors, and property owners can calculate the market value for a property that's purchased. Although it isn't a very precise tool for getting to a true value, it's still an excellent way to do a quick value assessment. It can tell you if further and more detailed analysis is worthwhile.
For example, if the GRM is too high or low compared with recently sold comparable real estate, it could indicate a problem with the property or it may be overpriced. Learn how to calculate it below.
- The gross rent multiplier (GRM) is a tool for analyzing the value of a rental property.
- To calculate GRM, divide the price of the property by its gross rental income.
- If the GRM is too high low compared to other rentals in the area, it could mean the property is overpriced or there's an issue with the property.
How To Calculate the Gross Rent Multiplier (GRM)
You can get the GRM for recently sold real estate by dividing the market value of the property by the annual gross income:
Market Value / Annual Gross Income = Gross Rent Multiplier
For example, if a single-family home property sold for $500,000, and the annual gross rent income on it was $36,000 ($3,000 per month) the GRM would be:
$500,000 / $36,000 = 13.9
Why Does the Gross Rent Multiplier Matter?
Investors who are actively seeking properties often have several on their radar. They have to find a way to quickly rank the opportunities so they can spend their time on deeper analysis of the best options.
The gross rent multiplier hopefully focuses the deeper research on the best options under consideration. But you shouldn't rely on it so much that you don't check out other real estate with better GRMs.
Commercial rental properties are evaluated based on a number of ratios and lender criteria. Lenders consider the income and profitability of the property as one of the—if not the—most important lending qualification criteria.
By knowing what the GRM is before you apply for a loan for the property, you can be better prepared to qualify for what you need. Other factors that may impact whether a commercial mortgage lender grants you a loan include your credit score, assets, debt, income, and more.
The U.S. Small Business Administration offers 504 loans which can be used by entrepreneurs looking to purchase commercial real estate.
Using GRM To Estimate Property Value
Let's say that you did an analysis of recent comparable sold properties and found that their GRMs averaged around 6.75. Now you want to approximate the value of the site you're considering for purchase. You know that its gross rental income is $68,000 per year, but you don't know the market value. Here's how you can estimate it: Multiply the GRM by the annual income.
GRM (6.75) x Annual Income ($68,000) = Market Value ($459,000)
If the property is listed at $600,000, you might believe it's overpriced. But if the price is, say, $499,000, it may be something you'd want to consider.
Generally speaking, the lower the GRM, the more likely the property will generate more income for you over time, according to multi-family investment firm Trion Properties.
Frequently Asked Questions (FAQs)
What is the gross rent multiplier?
The gross rent multiplier (GRM) is a way to evaluate a rental income property. It analyzes the property's price in comparison to the annual rent income it generates. It's displayed as a number, or ratio, and if it's too high or too low, it could be the property is over or underpriced, or there's an issue with the property.
What is a good gross rent multiplier?
There isn't one set number that is good vs. bad when it comes to gross rent multipliers. What matters is how the GRM of a property compares to other GRMs of competing properties. For example, if one property have a GRM of 7 and another has a GRM of 8, it could mean that the latter property is underpriced. Multi-family investment firm Trion Properties suggests that a lower GRM may be more lucritive.