Gross Rent Multiplier (GRM) | What is GRM in Real Estate?

March 19, 2021
March 19, 2021 disrupt

Gross Rent Multiplier (GRM) | What is GRM in Real Estate?6 min read

The Gross Rent Multiplier (GRM) is an important metric for real estate investors to know as it helps you to quickly determine a property’s worth. As you start planning on investing in real estate, you often come across a range of terms used by industry experts. Being an investor, you want to make sure you are equipped with the right tools to ensure you are investing in the right deals!

In this article, we will discuss the gross rent multiplier formula, what a good gross rent multiplier (GRM) is, and how you can use it as a tool to value your next investment property.

What is a Gross Rent Multiplier (GRM)?

So, what is a gross rent multiplier (GRM)? How is the GRM used in real estate?

The Gross Rent Multiplier is a valuation method that is used to differentiate, value, and examine investment properties. Properties can be valued individually or across an entire investment portfolio.

The GRM helps investors understand the ratio between the gross rental income of the asset vs the price of the property.

The Gross Rent Multiplies is widely used by investors to get a high-level view of the timeline it will take for a property to be paid off. Additionally, investors use the GRM as a screening tool to examine which properties in their pipeline are worth investigating further.

Keep in mind that this is not the only tool that investors use when underwriting a property. The GRM will merely help in the process of valuation for an investor.

 

Gross Rent Multiplier Formula

Here is the gross rent multiplier formula:

Gross Rent Multiplier = Price ÷ Gross Annual Rental Income

The price considered here is the fair market value or sale price divided by the property’s estimated gross annual rental income.

In most cases, you will examine the rent roll to find a property’s annual monthly income. The rent roll will be provided by the seller to investors inquiring about the property.

If you are not provided a rent roll by the seller, you will need to perform market research on the asking rents for comparable properties in your property’s submarket.

This will help you to determine an estimate of the annual rental income of the property.

 

What is a Good Gross Rent Multiplier?

In most cases, you will examine the rent roll to find a property’s annual monthly income. The rent roll will be provided by the seller to investors inquiring about the property.

If you are not provided a rent roll by the seller, you will need to perform market research on the asking rents for comparable properties in your property’s submarket. This will help you to determine an estimate of the annual rental income of the property.

Multiple factors cause your average GRM to fluctuate. Your gross rent multiplier will be largely determined by the submarket you are located in and the asset class of the property.

The lower your GRM the shorter the time frame it will take for you to pay off the property, meaning the more lucrative the investment opportunity.

The lower the GRM on a property, the better returns you will see. In multifamily real estate, you will find that Class B and C properties tend to have a lower gross rent multiplier than Class A properties.

Another factor to note is that the GRM tends to decrease over time. As your property prices rise due to economic appreciation, your GRM will decrease, and the better the deal gets.

Keep in mind, just because a property has a low GRM does not make it a great deal. It is important to analyze the property’s operational expenses to give you the full scope of the profitability of an asset.

Examples Of Gross Rent Multiplier

Let’s take an example to better understand the gross rent multiplier GRM. Imagine that you decide on purchasing a rental property for $10 million. The property generates a monthly rental income of $103,000.

You will need to multiply the monthly rental income by 12 to get to the annual rental income value.

$103,000 x 12= $1,236,000 (annual rental income)

So, your property generated $1,236,000 in annual rent. Now, you will plug this into the gross rent multiplier formula.

Gross rent multiplier= property price ÷ gross annual rent= $10 million ÷ $1,236,000=8.09

As you can see, the GRM of this property is 8.09.

 

The Importance Of Gross Rent Multiplier (GRM)

Let’s look further at some pros and cons of the Gross Rent Multiplier formula from a real estate investor’s perspective.

Pros Of GRM

  • The GRM allows real estate investors the ability to make quick comparisons across various properties that vary in locations and characteristics.
  • The GRM formula is a very simple calculation for investors to utilize.
  • As rental income is dependent on the fluctuations of the market, the GRM is a more accurate real estate valuation method.

 

Cons Of GRM

  • One of the more prominent cons is that the GRM does not account for operating expenses. You will find that when you are valuing the property’s price and rental income, the maintenance costs, repairs costs, and a series of other costs are overlooked Additionally, the Gross rent multiplier does not consider a notice to vacancies, delinquency, insurance, or taxes. All of which can dramatically affect your returns and give investors an inaccurate timeline of paying off their investment property.

 

GRM vs. Cap Rate

Another commonly used tool and term in the real estate multifamily property market is the Cap Rate. While they are used interchangeably, they aren’t the same thing. The most distinguishing factor about the two is that the Cap rate is measured using the Net operating income against the price of the property. In this, the NOI is divided by the price rather than the rental income. As compared to the Gross Rental Multiplier formula, the Cap rate measures the operating costs and other relevant expenses for the calculation. It is considered to be a much more advanced tool for valuing and assessing properties for investment.

 

GRM vs. Cash-On-Cash Return

The other term that is commonly thrown around by investors in the real estate industry is the cash-on-cash return. This is yet another method of valuing a real estate property. Investors are required to put in their investment in terms of cash, gross rent, and expenses to calculate the value of the property. As you can tell, this takes a long time to calculate but can give you a more accurate representation of an opportunity compared to the GRM.

 

Conclusion

The Gross Rent Multiplier is one of the most widely used tools in the market that helps investors determine whether a property is a good investment based on the gross annual rent and price. It is the ideal initial screening method used to differentiate between a wide range of investment properties!

 

The GRM provides a simplistic way to calculate the value of your investment property, helping to improve your deal screening process. However, with no regard to operating expenses, insurance, or taxes, the GRM should not be the only tool you utilize when underwriting your next real estate investment opportunity.

 

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