If you’re making your first foray into real estate, or you just want to make sure a potential rental property has serious earning power, you’ve probably come across GRM, or the gross rent multiplier formula before. The GRM is used widely in real estate as a quick way to evaluate a property’s money-making potential. But what exactly is the gross rent multiplier, and how do you use it? There are a couple of specifics to cover first.
What Is the Gross Rent Multiplier (GRM)?
The gross rent multiplier is a simple way to assess a property’s profitability compared to similar properties in a similar real estate market. It’s used by real estate investors and landlords alike, and because it’s a relatively simple formula, it can apply to both residential and commercial properties to assess their income potential.
You might also see the gross rent multiplier formula referred to as GIM, or gross income multiplier. They both refer to largely the same formula, but many investors use GIM to also account for sources of income aside from just rent, such as tenant-paid laundry services or snack machines on a property. In most cases, you can assume they mean and refer to the same thing. Before you start calculating GRM for a property, know that it won’t replace more in-depth ways of assessing property value. Think of it as a first step before you evaluate a property in more detail.
How to Calculate GRM
Here’s how to calculate the gross rent multiplier:
Gross Rent Multiplier = Property Price / Gross Annual Rental Income
In the formula, the property price is the selling price of the property in question, and the gross annual rental income is how much money you would make in a year from rent on the property. Let’s say you’re looking at a property listed for $400,000, and the gross annual rent (monthly rent times 12) would be $35,000.
$400,000 / $35,000 = 11.42
For the sake of simplicity, lets round that down to 11.4. A single GRM doesn’t mean much without context, but you should always look for a lower number. If 11.4 was the lowest number of a selection of similar properties in a similar market, then it might be worth exploring the property. But, if you find other properties with GRMs lower than 11.4, those properties most likely have a higher earning potential.
How to Use the GRM Formula
The gross rent multiplier formula can be used for more than simply calculating the GRM factor. You can use GRM to come up with the fair market value for similar properties in a market or use it to calculate gross rent.
If you want to calculate the fair market value of a property, plug in the gross rental income and the GRM into the equation:
Gross Rent Multiplier = Property Price / Gross Annual Rental Income
Maybe you know the GRM for the properties in the area is six, and you used a gross rent estimate (if the property is vacant) of $40,000.
$40,000 x 6 = $240,000
A GRM of six times a gross rental income of $40,000 gets you get a fair market estimate of $240,000. Again, this is just a rough estimate, but it can be helpful when looking at multiple properties.
The GRM equation can also be used to estimate gross rental income. Simply divide the fair market value of the property by the GRM. So, if you have a property listed at $600,000 and you know the GRM is eight:
$600,000 / 8 = $75,000
This approach can be a good rough estimate for how much rent you’ll receive before property expenses.
What Is a Good Gross Rent Multiplier?
A GRM without context isn’t much help. It’s best to invest in properties with a GRM between four and seven. If you don’t find properties in your desired market with a GRM in that range, the lower the number the better. Why? Because the GRM is a rough estimate for how long it will take you to earn back the cost of your property. The less time it takes you to recoup your investment cost, the better.
However, a good GRM on a cheaper property doesn’t necessarily mean you’ve struck gold. GRM is a rough estimate, and it’s wise to have the property inspected and appraised before you close so you know what to expect in repair and maintenance costs. Buying a cheap property, even one with a good GRM, could mean that excessive repairs and maintenance will eat into your profit. If you decide to invest in the property, keep track of all rental-associated costs by tracking your expenses with Apartments.com. Our platform will help you summarize rental expenses by property and tax category. From there, you can easily export them to CSV or PDF formats to make keeping track of costs quick and easy.
Difference Between GRM and Cap Rate
The cap rate, or capitalization rate, and GRM are often associated with each other and frequently thought of as the same calculation. The two are quite different though. Remember, GRM uses gross rental income. That is rental income before any operating expenses such as repairs, maintenance, utilities, etc. The cap rate uses the net operating income, or the amount of income after these expenses.
GRM is great for making a quick assessment on the earning potential of a property. The cap rate should be used after you’ve scrutinized a property in more detail and had its monthly costs projected. This way you can estimate how money much you’ll be taking in every month.
Pros and Cons of GRM Calculation
The gross rent multiplier can sound like a strange concept before you grasp how simple of an equation it is. And with so many applications you might feel like a real estate expert on the rise, but what are the pros and cons of the gross rent multiplier formula?
Pros
GRM is a simple equation to understand. Once you know the terms involved, GRM is quite simple to calculate and apply.
GRM is easily understood. Almost anyone in the real estate business will understand the concept of GRM, so working with investors or property managers should be simple when they know what you’re looking for.
GRM is easily applied to other properties. The GRM for similar properties in a similar market is almost always the same. So, once you know the GRM for one property, you can get a good understanding of the area as a whole.
Cons
GRM does not account for depreciation. The GRM only takes into account the current market value for a home. As the market changes and your home depreciates or appreciates, the GRM must be recalculated.
GRM does not account for expenses. The GRM formula only uses gross rental incomes. It doesn’t account for expenses, maintenance, taxes, or vacancies. Those can only be projected when you assess and inspect the home (or similar properties).
Math may not be everyone’s cup of tea, but thankfully the GRM equation is a relatively simple way to understand a property’s earning potential. Whether you’re a real estate mogul or you’re just starting to look for your first investment property, the gross rental multiplier will become one of your best tools as you look for a diamond in the rough of rental properties.
