Gross rent multiplier (GRM) is a figure used to evaluate multi-unit and commercial income producing real estate investments. It uses the price of the building, divided by the gross rents to arrive at a ratio that may be compared and contrasted with similar investments in a similar market.
How Gross Rent Multiplier Is Used
The gross rent multiplier has two applications. If you know the price of the building and the rent roll, it can be used to compare and contrast against other investments properties. If you know GRM in your area and have the rent roll, it can help you quickly ballpark the value of a building.
The gross rent multiplier (GRM) is also known as the gross rate multiplier, and the gross income multiplier (GIM) if it also considers additional sources of income such as onsite coin laundry. The calculation isn’t an appraisal tool, but it is used by investors as a way of doing their due diligence before making an offer.
In short, it can be used as a filtering process to help either reject a candidate property, to keep one under consideration, or to use the figures as a negotiating tool.
How to Calculate Gross Rent Multiplier
The gross rent multiplier calculation is:
Gross Rent Multiplier = Property Price / Gross Rental Income
Only 3 numbers are involved: property price, gross rental income, and the GRM itself. From 2 of those numbers, you can arrive at the 3rd.
If you already have this figure on-hand, this is kind of self-explanatory. But, if you are trying to determine a building’s value, or are negotiating possible price, keep in mind that the GRM equation can help you ballpark a building’s potential price.
Gross Rental Income
Gross property income can be examined two ways. Gross rental income looks only at the potential rent roll. Sometimes a different slant is used, referred to as gross scheduled income or just gross income, which adds the rent roll and other income sources (ex. coin laundry) for the property. Either approach can be used, but neither factors in vacancies or expenses. In calculating GRM, whichever income figure is used is usually expressed as an annual amount, not as monthly one.
Examples of Gross Rent Multiplier Formula
Using the gross rent multiplier formula, let’s go through 3 variations of the calculation; one to calculate GRM, one to calculate potential price, and a final one to estimate potential rents.
Calculating GRM From Asking Price and Gross Annual Rents
Let’s say you have the following information: a 4-unit building with an asking price of $400,000 and gross annual rents of $38,400. Remember, the formula is:
Gross Rent Multiplier = Property Price / Gross Rental Income
So, GRM would be:
GRM = $400,000/$38,400 = 10.42
Is 10.42 a good figure? You don’t know yet. Later on, you’ll read about how GRM’s value is local in nature and used to compare and contrast with other properties in the same market.
Using GRM to Estimate Property Price
Let’s say you know your area’s ballpark GRM. Let’s also say you are looking at investments and have a promising candidate but you don’t believe the asking price is in line with local values. You can use GRM to help calculate a potential price for the building. The formula looks like this:
Potential Price = Gross Rental Income x Gross Rent Multiplier
Assume you are considering a multi-unit building with an annual rent roll of $54,000. You’ve done your homework and know that the GRM in your area is roughly 8.5. Using that information you can arrive at a ballpark price:
Potential price = $54,000 x 8.5 = $459,000
Using GRM to Estimate Expected Rents
One final variation is using GRM to help calculate what the rent roll for a building should look like. If you have the asking price and know your market’s GRM, you can get an idea of what gross rents should be:
Gross Rental Income = Property Price / GRM
Let’s say you’ve found a seller asking $399,000 for a 4 unit building, but the seller is a bit sheepish on providing you with gross rent figures. Let’s say you know your market’s GRM is 9.4. You can get an idea of what the gross rents should be:
Gross Rental Income = $399,000/9.4 = $42,447
You can then compare that anticipated figure with what the landlord eventually provides to you.
Free GRM Template
Use our free downloadable template for computing gross rent multiplier or property price. If you have 2 of the 3 important figures, you can use it to quickly compute the 3rd.
Advantages & Limitations of Gross Rent Multiplier
The gross rent multiplier has many applications, but it is not a tool used in appraising a property. You must be familiar with both its advantages and limitations in order to use it effectively.
Advantages of the Gross Rent Multiplier (GRM)
Gross rent multiplier is just one tool of many to help you gauge the financial performance of an income producing property. It can be used to quickly assess the potential of a property before making an offer on a foreclosed home or bidding on a home at auction. GRM can be a helpful tool for buyers and sellers alike.
GRM is More Useful Than Price-Only or Price-Per-Unit Examination
Price alone is not a very good indicator of value for an investment property because it doesn’t take into consideration the income that’s generated. Even if you compare one building’s price against another’s, without examining income potential, you just can’t properly evaluate the deal. GRM considers income in relation to price.
Another very common tool used in determining rental property values is price-per-unit. Price-per-unit is a good tool for comparing similar properties, like apartment buildings or multi-family properties, but it still has the flaw that GRM overcomes. That is, GRM considers the rent roll while cost-per-unit does not.
GRM is An Effectively Screening Tool for Potential Properties
The gross rent multipliers is not an appraisal tool. Its primary purpose is for screening properties – allowing you to compare and contrast potential investments to see which ones show the most promise from the standpoint of rent and/or price.
GRM Can Be Used Effectively By Both Buyers And Sellers
Because the gross rent multiplier is a ratio between price and rent, if one of those figures changes, the outcome of the calculation changes. That figure can either favor the seller or buyer depending on how it compares to the typical GRM for your area.
If you are a seller, you want to see a GRM a bit higher than market because it represents getting a bit more for the property. If you are buying, you want to see a GRM figure a bit lower than what’s typical because it may mean the price is below market. Or, it can mean that rents are a bit higher than for similar properties.
Limitations of the Gross Rent Multiplier (GRM)
GRM has evident limitations. In particular, it doesn’t take into consideration vacancy and operating expenses, both of which are significant factors in a building’s overall finances.
GRM Doesn’t Take Vacancy Into Consideration
Because the gross rent multiplier uses gross scheduled rents, vacancies are not taken into consideration. That’s an important limitation because all buildings have vacancies, and vacancy rates are higher for poorer performing buildings. There’s a huge difference between what a building can bring in, and what it actually does generate and GRM doesn’t account for that.
GRM Doesn’t Take Expenses Into Consideration
Obviously, any income property has expenses. Yet, gross rent multiplier doesn’t factor in the expense side of the finances. It looks only at gross rent, not net rental income after expenses. Since operating expenses can vary tremendously from one building to another, GRM’s exclusion of them is significant.
Gross Rent Multiplier Versus Capitalization Rate
A cousin to the GRM is capitalization rate or simply cap rate. Cap rates utilize net operating income, which factors both vacancy and operating expenses into the equation. In that regard, cap rates are superior to GRM, although computing cap rate takes a bit more effort. In any event, a skilled investor should use both cap rate and GRM when evaluating potential investments.
Gross Rent Multiplier Is Only Useful in Comparison to Other Properties
Since different cities have different real estate prices and rent levels, gross rent multiplier figures vary from market to market. You can’t simply say a building has a “good” GRM. The number has to be compared and contrasted to other properties in the area for it to be meaningful.
As an example, let’s say you are looking at two investment properties; one with a GRM of 13.0 and the other with a GRM of 8.10. You can’t just conclude that one of them is good and the other is not so good. On the other hand, if you are aware that your market’s typical GRM is 10.0, you have a point of comparison. You’d probably dig deeper into the first property, and ignore the 2nd. Why? If you recall, buyers want to see lower GRM because it potentially means either a lower price and/or higher rent than the market. Comparing each property to the area’s GRM allowed you to make the decision.
Bottom Line: Gross Rent Multiplier
Gross rent multiplier is a tool used for by evaluating income producing properties and real estate investments. The formula uses the building’s price, divided by gross rents to arrive at a figure to compare similar investments within a given market. GRM is good for screening potential investments but is limited because it doesn’t factor vacancy and expenses.