Gross Rent Multiplier Calculator
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What is the gross rent multiplier?
Gross rent multiplier, or GRM, is a tool used to assess the value of investment rental properties. It is sometimes also referred to as the gross revenue multiplier. The GRM is determined based on the property value and the gross rental income.
Why do I need to know the GRM?
If you are searching for a property, you will want to make sure that it will be a good investment. GRM is a tool that allows you to compare properties within a similar area to determine which is the best value for money. It is one of the primary metrics your real estate agent will use when showing you a property, and it is typically included on a property’s real estate listing along with its price per ft2.
How do you calculate the gross rent multiplier?
Gross rent multiplier formula:
GRM = property price / gross rental income
The GRM is calculated by dividing the price of the property by the annual gross rental income. The property price is the asking price or fair market value of the property. The gross rental income is the money directly collected in rent before deducting expenses like insurance, maintenance, taxes, advertising, or homeowner association fees. If you have multiple units within a property, it is the sum of all rental payments.
For example, if you are looking at a property that has a value of $1 million and an $85,000 gross annual rental income, you will have a GRM of 11.76.
$1,000,000 / $95,000 = 11.76
Keep in mind that the equation for the gross rent multiplier calculator uses the gross annual rental income. If you know the gross monthly rental income, you can input that into our calculator and it will automatically convert it to an annual rental income.
What is a “good” GRM?
You have now used the gross rent multiplier calculator to determine your GRM, but what does this number actually mean?
As someone purchasing a building, you want to look for a low GRM. Although GRM may go into the teens, ideally, it would be in the single digits.
If the GRM is higher than other similar properties in the area, it may be overpriced. However, if the GRM is significantly lower than other similar properties, it may indicate a problem with the property, reducing its value.
Keep in mind that some cities may have higher a GRM overall. For example, Los Angeles would have a higher GRM than a similar property in a small town in the Midwest. Therefore, it is necessary to look at GRM in comparison to other properties in the area rather than at face value.
GRM fluctuates with real estate prices; it will increase as property prices increase over time, or potentially decrease during a recession.
It is also important to consider the operating costs associated with the property (utilities, maintenance, management, repair, vacancies). A low GRM property may be older and need more capital investment to make it rentable.
In our first example, we used the gross rent multiplier formula to determine that the GRM was 11.76. Let’s say that you are considering a second property, listed at $1.3 million with a gross annual rental income of $140,000.
$1,300,000 / $140,000 = 9.29
The GRM of the second property (9.29) is lower than that of the first property, which has a GRM of 11.76. Based solely on the GRM, the second property would be a better investment. However, it is essential to look further into the finances and details of the property.
What are some limitations of the GRM?
GRM is a screening tool used to compare properties against one another to determine whether the building is a worthwhile investment. It is a simple calculation that gives you a quick idea of how multiple properties compare to one another from an investment standpoint. However, using the gross rent multiplier calculator is just a starting point, and if you are seriously considering the property, there are many more financial aspects you will have to consider.
It is also crucial to understand that GRM is a tool to compare properties, not the amount of time it will take to pay off the purchase. The length of time needed to pay off the property is affected by several additional factors, including loan payments, vacancies, and repair and maintenance expenditures. If you need to calculate your overall return on investment on a rental property, taking into account these operating expenses as well as rent and vacancy rates, you can use our cap rate calculator or our more detailed rental property
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