When making decisions about what properties to invest in, real estate investors, landlords, and agents working with these parties often do a variety of metric analyses to find out which properties are going to make sense from a long-term financial perspective. Sometimes, a property might seem like an obvious choice, but it’s expected performance data isn’t as impressive.
One of the most commonly used statistics to make this type of determination is the gross rent multiplier, also known as the GRM. This calculation helps investors see what type of long-term return they can expect to see from a property with ease as the number is a simple ratio.
Have you used GRM before, and do you know what type of GRM is good for the areas that you work in? If you aren’t yet familiar with this metric, you’re missing out on an opportunity to improve your business and the choices you make.
Every investor and landlord struggles to make decisions about properties at times; having more tools on hand to make those choices easier is always a great option.
Let’s learn more about gross rent multiplier calculations and how you can implement them easily.
A Table Of Contents About Gross Rent Multiplier
- What Is GRM In Real Estate?
- How To Calculate Gross Rent Multiplier
- Using GRM To Guide Purchases
- FAQs On The Gross Rent Multiplier
What Is GRM In Real Estate?
Gross rent multiplier, also known as GRM, is a ratio used to understand the income potential value that a property has based on costs, investment, income, utilities, and more. In the simplest form, GRM represents how many years you can expect it to take for a property to pay itself off through received rent.
Why Is GRM Useful?
GRM is used by real estate investors to make decisions about what properties to invest in, what properties to move on from, and how to prioritize their portfolios.
Often, you might find more than one property that you are considering investing in, but it can be hard to make the final decision about which property is going to make the most sense for your business. Finding the right metrics to rank your options is hard, and using GRM can be a simple way to compare the potential of the properties.
GRM won’t give you all of the answers, but it will help you to narrow the selection pool down to the most important options so you can then do your own, deep analyses between a smaller selection pool.
How To Calculate Gross Rent Multiplier
How is GRM calculated?
The basic gross rent multiplier formula is very simple: divide the market value by the annual gross income expected from the property.
For example, a property with a $200,000 sale price and a $9,600 annual income would have a GRM of 20.83.
Comparing GRMs
Remember that the GRMs of properties of different types are going to be very different, but you can only compare those GRMs that are from comparable properties.
Let’s look at our earlier example of a $200,000 property with a GRM of 20.83.
An $800,000 property with $150,000 of annual income will have a much lower GRM of 5.33, but these two properties would not be considered to be direct contenders because they are not in the same market.
While the $800,000 property would be paid for in just over five years, it’s unreasonable to say that this would be the better choice for all landlords because not all landlords will be able to purchase that type of property outright.
The right GRM value for your business is going to depend on where you work, what type of properties you manage, and what your long-term business plans are. There isn’t a single “sweet spot” for GRM; the number is a ratio that should be used for learning and comparison rather than a strict guide.
Using GRM To Guide Purchases
In addition to simply using this metric to compare properties from your long list of options to narrow the selection pool, you can also use GRM to determine if a purchase price is reasonable for your business or not.
Here’s how to use GRM to estimate property value in your area:
- Calculate GRMs for your own successful properties in the area as well as for comparable properties
- Average those GRMs to get your baseline GRM
- Find a property you are interested in
- Calculate its estimated gross rental income
- Multiply the estimated gross rental income by the average GRM that you found in Step 2
The number you get is an estimated purchase price that would be reasonable for the property based on what you can expect to get out of it in terms of rental income in the area. If the purchase price is significantly higher than the number you just calculated, you will want to negotiate for a better price or move on to more profitable options.
FAQs On The Gross Rent Multiplier
What Is A Typical Gross Rent Multiplier?
There is not a specific gross rent multiplier that can be considered the average or expected GRM because these ratios are going to be highly dependent on property type and market. Rather than relying on finding a property with a specific GRM, it is better to create a scale of GRMs for your specific area.
By analyzing your primary market and finding out the GRMs of your most and least profitable properties, you can create a scale that helps you know which range of GRM is ideal for your area. Once you create a guide like this, you can use it as a reference for all investment deals moving forward.
How Do You Calculate Gross Rent Multiplier?
The calculation for gross rent multiplier is very simple:
- Find the property value or purchase price
- Calculate an annual gross income estimate
- Divide the property value by the annual gross income
The resulting number from that calculation is the gross rent multiplier for the property.
Is A High Gross Rent Multiplier Good?
Generally speaking, higher gross rent multiplier ratios are less desirable than lower gross rent multiplier ratios. Simply put, the GRM can be considered to be the number of years that it would take for a property to be paid off by the gross income generated.
If a property has a very high gross rent multiplier, this means that it will take even longer to pay off the property.
That being said, GRM is most useful as a comparative metric rather than as a cut-and-dry guideline. GRMs calculated on your most successful properties will help you put into perspective what type of GRM is good for your area, and using these numbers requires a bit of a learning curve.
What Is The Difference Between Gross Rent Multiplier And Cap Rate?
Many new landlords and investors confuse gross rent multiplier with cap rate, but the two calculations represent different data sets.
GRM is based on the gross rental income of the property while capitalization rates, also known as cap rates, are based on the net return generated by the property.
The calculation for cap rate divides the property value by the net operating income (NOI) received for the property. Cap rate considers things like vacancies, operating expenses, and more when determining the final rate.
While this is a more accurate number to use in some cases, the data needed to calculate cap rates are not always available to landlords who are looking to quickly compare and contrast available properties. That is why GRM is favored as a quick analysis tool.
What Is Net Rent Vs Gross Rent?
Net rent takes into account the expenses that go into maintaining a property such as operating costs, expenses, vacancy calculations, and more. Gross rent simply adds up all of the rental payments that are received to total them into one annual gross rental income statistic.
Conclusion
As you move forward and continue to expand your rental portfolio, there are going to be times when you aren’t sure which properties make the most sense to consider for future rental investment properties. In those moments, using GRM to make the comparisons quickly and easily can be a great assist.
There are many different calculations and tools that can be used to make comparisons, and every single one of them has its uses. Consider using the gross rent multiplier to make your selections in the future, and it might help simplify some of your choices.