What is a Gross Rent Multiplier (GRM)?

You may determine the market value of an income property using the gross rent multiplier (GRM). Its a market-driven measurement. The market worth of a property you are contemplating for purchase should equal that same "X times" its gross income, which other purchasers have lately been paying for homes in the same location.

Advantage of Gross Rent Multiplier?

The GRM benefit is how simple it is to compute. The drawback is that nothing so fundamental is probably going to be really precise or dependable. The time value of money is ignored by GRM, and it does not distinguish between properties where renters may be responsible for all, part, or none of the operational costs.

This measurement might be a helpful starting point for a thorough property study. However, you can anticipate that a thorough investigation will probably not make this investment appear more enticing, unless at a slightly reduced price, if you notice that a property is offered for sale at a GRM that is far greater than what is common in the market. If the GRM alerts you that the property is likely much overvalued, you can then choose if you want to invest the time in research and estimates.

GRM vs. Cap Rate: Commercial Real Estate Investing Metrics

The net operating income (NOI) of a rental property is contrasted with its fair market value using the capitalization rate, or "cap rate". Just like the GRM, the cap rate is used to assess returns and profitability in real estate.

All other things being equal, the expected return on investment (ROI) increases with cap rate. In contrast, the predicted return increases as the gross rent multiplier decreases. A smaller multiplier suggests a quicker payback period and more possibility for increased long-term income.

A significant factor in determining the cap rate is net operating income (NOI), which is obtained by deducting different operational costs such property taxes, insurance, vacancies, and unit maintenance.

As a result, the capitalization rate, albeit more time-consuming to compute, is regarded as a more thorough and insightful indicator in real estate investing. However, the GRM is mostly utilized as a screening tool.

How to Calculate GRM:

Gross Rent Multiplier = Market Value/ Gross scheduled Income (annual)

Example:

You find that five apartment buildings have sold in the past six months. The sales data are shown below:

Property

Selling Price

Gross Income

1

660,000

96,000

2

1,125,000

150,800

3

900,000

120,000

4

1,380,000

220,000

5

815,000

120,000

The math is straightforward. For each property, you divide the selling price by the gross income to determine its GRM.

Property

Selling Price/ Gross Income  

GRM

1

680,000/ 97,000

6.875

2

1,125,000/ 150,800

7..460

3

900,000/ 120,000

7.500

4

1,380,000/ 220,000

6.272

5

815,000/ 120,000

6.791

Rule of Thumb:

Since the GRM is market-driven, there is no one, ideal value, but there are acceptable ranges. Realistically, you would probably be shocked to see a GRM greater than 10 and shocked to find one below 4.

Hope you enjoyed this post on Gross Rent Multiplier, let me know what you think in the comment section below.

Feasibility.Pro-fahad

About the Author

 

Mohammad Fahad, is a seasoned real estate professional with experience working on client side as well a consultant. He talks about #feasibilities, #divestments, #dealstructuring, #pricing, and #realestatedevelopment. He can be contacted on Linkedin, if you are excited to get in touch with him.

Are you someone involved with
real estate feasibility?

We are excited to launch the next generation of real estate feasibility software by April 2023.

claim your 15% early-bird discount

Know more about the product features