A gross rent multiplier (GRM) is a financial metric that analyzes and compares multiple investment properties to understand a property’s potential profitability. It uses the price of the building, divided by the gross rents, to arrive at a ratio that compares and contrasts similar investments in a similar market. It also estimates the payoff period of the property or unit. Using the GRM formula is one of the easiest and fastest tools in preliminary screenings of potential investment opportunities.
The two variables to input into the gross rent multiplier calculator are:
- Property price: The asking price or market value of the property for sale
- Gross annual rental income: Annual rental income collected before expenses
The output will be the gross rent multiplier (GRM), which is the ratio that determines how long the rental income will take to pay for the property. Use our calculator below to guide you through the process of computing for the GRM:
Gross Rent Multiplier Examples
When calculating the GRM, take the total purchase price of a property and divide that by annual gross rental income. Don’t take into account any other expenses associated with the property when determining rental income, like taxes, property management fees, and utilities. However, you do want to include any additional income generated in association with the property, like parking, storage, laundry, and amenities.
Here are sample scenarios on how you can apply the GRM formula:
Let’s say you’re looking at an investment multifamily property costing a total of $300,000. The property has five units available for individual rental at $2,000 per month without any additional income revenue attached.
Calculate annual gross income: $2,000 x 5 units x 12 months = $120,000 in gross annual revenue
Then you can calculate the GRM: $300,000 / $120,000 = 2.5 GRM
Another calculation example takes into account other income revenue, such as storage access in the basement. The building costs $1,000,000. There are seven units renting for $3,000 plus $200 per month for storage, totaling $3,200 per unit, per month.
$3,200 x 12 months x 7 units = $268,800 in annual gross revenue
Then calculate the GRM: $1,000,000 / $268,800 = 3.72 GRM
Common Ways to Use the GRM Formula
The GRM is specific to each individual housing market, and the GRM in one city may not apply to a neighboring area. Typically, investors should aim to have a GRM between 4 and 7. A low GRM isn’t always the better opportunity, as it may mean you might have to invest more money in the property in the long run.
One opportunity to use the GRM is to determine the value of the income generated from a current investment property. To calculate what a fair GRM is within a specific area, you should run a rental market analysis to find current, comparable, and recently sold properties in the area to see if the property value is set too high or too low.
Let’s say a neighborhood’s GRM is around 5, and you calculate the GRM of your property to be 8. This tells us that your GRM is high compared to the surrounding properties, which is an opportunity to raise rents to meet the fair market value.
A GRM calculation can also be used to compare two properties of interest to you. For example, take a look at Property A and Property B below. These two properties have significantly different property prices along with varying rental incomes. Initially, an investor may see the sticker price and want to move forward with Property A because it’s much lower in cost. However, after taking into account the rental income, Property B has the lower GRM. This means that Property B appears to be the more valuable opportunity.
Investors shouldn’t use GRM alone when proceeding to invest in property. Use the GRM to determine which opportunity is the better investment, and then make a deeper financial analysis of the property to factor in other costs.
Other Ways to Use the GRM Calculator
The gross rent multiplier formula consists of three different variables: property price, gross annual rental income, and gross rent multiplier. You can manipulate the variables in the equation to calculate the estimated property price and rental income.
Estimate Property Price
Estimated Property Price = Gross Rental Income x Gross Rent Multiplier
Example: You’re looking to potentially purchase a five-unit building, and the comparable buildings in the neighborhood have asking rents on the market of $2,000 per unit. First, find your gross annual rental income and then input the income and GRM into the estimated property price formula:
Your gross annual rental income would be $2,000 x 5 units x 12 months = $120,000
Estimated Property Price = $120,000 x 5 units = $600,000
Estimate Rental Income
Estimated Gross Rental Income = Property Price / Gross Rent Multiplier
Example: You can also reverse engineer the GRM equation to find the estimated rental income. Using the same GRM above, you have a potential investment opportunity with an asking price of $400,000 for a five-unit building. To find the estimated rental income, use the following equation:
Estimated Gross Rental Income = $400,000 / 5 units = $80,000
You can take it a step further to calculate your monthly gross rent multiplier by dividing the estimated gross rental income by the number of units and months to get the estimated rent per month.
$80,000 / 5 units / 12 months = $1,333.33 per unit, per month
As an investor, you should run the estimated rent in comparison to what is on the market to see if you can adjust your rent higher to increase profitability.
If certain data is not readily available to you, or you have a large portfolio of properties to continuously evaluate, you can enlist the rent analysis tool from Avail to help you set rent prices. In minutes, it takes neighborhood data and county trends to create rent benchmarks based on comparable units. The platform will then suggest rent estimates for your property.
Advantages & Disadvantages of Using the GRM
Using the GRM to create a baseline for understanding investment opportunities has advantages and disadvantages. Although it’s an easy-to-use formula for understanding property value, if the financial metric is used incorrectly, it can be a costly decision and put your investments at risk. After understanding the pros and cons of the formula, investors can use it to decide how they apply GRM to their investment strategies.
There are many reasons why it’s beneficial to use the GRM calculation:
- Easy to calculate: The formula doesn’t require additional analysis once you are able to identify property price and gross rental income.
- Keeps you up to date on market changes: Analyzing your investment’s GRM annually can help detect market changes. Perhaps the neighboring GRM has gone up or down and will help you price units accordingly to keep vacancies low.
- Compare several properties at once: The two variables to the GRM equation are typically easy to access when investment opportunities arise, so investors may use the formula across multiple properties to identify the best value.
- Can be used by experienced or novice investors: The same formula is used whether you have experience in investing or not. The GRM is also analyzed in the same way, determining property value and investment opportunities.
- Useful to buyers and sellers of properties: Although the formula is excellent for pricing out rental units, it’s equally beneficial to buyers and sellers using it to help price out the property. Sellers who have made significant improvements to the property can price their sale slightly above average GRM in the neighborhood, whereas buyers will use GRM to determine if their property is undervalued and, therefore, a good deal.
Although there are many benefits to using the GRM formula, there are also some limitations to the calculation. It may be a simple and easy calculation, but it does leave out other necessary data that can impact investments. The GRM should always be used with other financial metrics for a more comprehensive analysis once you’ve narrowed down your list of prospective investments.
The formula is not a perfect one-size-fits-all measurement due to the following restrictions:
- Does not consider operating expenses: Operating expenses are not a factor considered in the GRM equation. However, they should be an important factor for investors to analyze. If operating expenses are high or perhaps the mortgage payment is high due to rising interest rates, the investment may not be profitable even with a low GRM.
- Can only compare in similar markets: The GRM is only a useful tool for comparing properties in similar markets or neighborhoods. Every state or city’s GRM varies, so an investor cannot compare five properties in five different states to get an accurate value from the equation.
- Doesn’t take into account vacancies: Vacancies can exist in market downturns or with the poor upkeep of properties not appealing to prospective tenants. Vacancies can cause an investor to reduce profits or take a financial loss if unable to recoup the loss in income elsewhere. Solutions like Avail can help landlords minimize vacancies since it helps market your listings, screens potential tenants, and streamlines the entire leasing process.
- Missed opportunities can exist: Although the GRM is a good indicator of investment value, other factors may make you miss out on investment opportunities, like a pandemic and changes in state and city laws.
- Only measures gross potential income: The GRM does not take into account net operating income. Net income would take into account the expenses associated with property upkeep, like maintenance, vacancies, turnover cost, and eviction costs, that can change your profitability.
For new and experienced investors, keeping track of property expenses manually can be difficult. Implementing property management solutions like Buildium, which has an integrated accounting solution, can streamline property management for all investment properties. Not only does it help manage day-to-day maintenance requests from tenants, but the accounting solution also helps investors manage accounts payable, accounts receivable, and bank reconciliation for accurate financial reporting.
If you’re a property investor weighing your investment opportunities, use the GRM calculation to help you make the best financial decision. The GRM is a tool used to determine a property’s value and gives a baseline for investment performance. It should not be used to give the full property analysis, but it provides a quick estimation to help you decide which properties to pursue.