Gross Rent Multiplier Formula: How to Calculate and Use GRM

The gross rent multiplier is a metric that helps real estate investors assess a property’s value by dividing the price of the property (or its fair market value) by the projected gross annual rental income. GRM helps real estate investors prescreen the investment value of a property to get a basic idea of cash flow before further investigating whether a rental property may indeed be a good investment.

The calculation assumes that the investment will be used as a rental property income but doesn’t account for factors like operating expenses, maintenance, or other kinds of income or expenses. For example, two properties built 30 years apart may have a similar GRM. While the newer property is in good shape and only requires minor maintenance, the older property may have more costly maintenance and repair needs.

The gross rent multiplier formula is:

GRM = property price / gross annual rental income

The only information you need to calculate the GRM is the property price and the gross annual rental income. The property price can be either the asking price (also known as the purchase price) or the fair market value. Gross annual rent includes the sum of a full year’s monthly rent for the total number of rental units, as well as extra income from amenities such as storage units or parking spaces.

Say a property listed at $500,000 has four rental units that each generate $1,000 in monthly rent and $50 in monthly parking fees. Those four units generate $4,200 per month in rental income; multiplied by twelve months in a year, that makes the annual gross income $50,400. With the property price and annual gross rental income, you can use the gross rent multiplier formula:

Property price ($500,000) / gross annual rental income ($50,400) = GRM (9.92)

Here, a GRM of 9.92 means that you would begin to see a profit after just under ten years. The general rule of thumb is that, the lower the GRM, the less time it will take for the rental income to offset the initial investment cost.

The gross rent multiplier serves multiple purposes for different parties.

• Investors: GRM provides a simplified overview of a property’s potential return on investment. A low GRM can indicate a higher or faster ROI, but GRM should be used in context as some areas may have a lower GRM on average. Agents and investors can compare the GRM of a prospective investment property to the GRM of similar properties or the average GRM of the area.
• Lenders: Banks and other loan institutions may consider a variety of criteria and ratios when approving mortgage amounts. The GRM gives lenders an idea of a property’s income and profitability, which is important when they’re assessing whether the buyer is qualified. This applies to both residential and commercial real estate.

GRM is a handy calculation, but it doesn’t give the entire picture of the property or comparable properties. Here are seven important factors that are not part of gross rent multiplier calculations.

1. 1. Insurance
2. 2. Mortgage rates
3. 3. Maintenance and repairs
4. 4. Operating expenses
5. 5. Property management
6. 6. Property taxes
7. 7. Vacancy rates

GRM and capitalization rate (cap rate) are both metrics that account for income and property valuation, but with different formulas and factors. While the GRM formula uses only the property price and annual gross rental income, the cap rate formula uses net operating income (NOI) that factors in expected operating costs such as insurance, property taxes, maintenance, and property management. The cap rate formula is:

Cap rate = NOI / market value or purchase price

While neither the GRM nor cap rate can fully assess or predict the actual return on investment potential of a property, they can each provide a rough analysis. Be sure to do your due diligence when evaluating potential investment properties.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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