Gross Rent Multiplier for Real Estate Investors

Posted by Highrises.com Concierge on Wednesday, April 8th, 2020 at 10:51am.

How is the Gross Rent Multiplier Calculated?

Calculating the gross rent multiplier for a parcel of real estate is simple: market value divided by gross annual rent income. For example, if you have a million-dollar condo building that makes $150,000 a year, the GRM is 6 2/3. You should raise an eyebrow at any GRM above 12 or below 4.

Estimating Market Value

Usually, you'll be solving for fair market price. Multiply an average GRM for your target market by the amount of money you expect to earn in rent on a specific property, and you should get that property's estimated market value.

Comparing With Other Metrics

GRM is not the whole story. In fact, it's generally less reliable than capitalization rate — another popular investment property opportunity identifier. Cap rate uses net operating income to estimate ROI. GRM has a basis in gross annual rent income and estimates market value. The bottom line is that cap rate is usually more accurate but harder to calculate accurately, so don't feel bad about using GRM in the initial stages of your property search.

Screening Opportunities

The textbook use for GRM is identifying opportunities for investment, especially in multifamily properties. You take estimates or real data on gross rent incomes and then multiply that figure by the market's average GRM. Then, compare your estimated fair market price (the product of your multiplication) to the actual asking price.

For example, imagine you were looking at a parcel of 16 2-bedroom units. The market's average rent of $2,000 for a 2-bed and average occupancy rate of 85% would lead you to expect a gross rent income of about $27,000.

Imagine the GRM for that market was, like the million-dollar condo building discussed above, 6 2/3. Multiply that figure by your projected annual income, and you get a fair market price of somewhere around $180,000.

During Negotiations

GRM can be a useful tool in your toolkit when approaching sellers or agents during negotiations. If you're interested in an outlier, you can use a discussion of this statistic to uncover information about why the property leans towards a high or low multiplier relative to the market at large.

Coming prepared with data usually nets you better answers. In some cases, you may even take some of the hot air out of an overpriced listing with a pointed reference to the gross rent multiplier — but don't bet on it.

Listing Your Property

Taking an average GRM and applying it to your property's income could be a good way to inform your own listing prices. Keep in mind that many purchasers are using this statistic to screen properties. You can usually get on more people's radar by edging your asking price closer to the average for your market.

Performing In-Depth Analytics

Analytics are an instance where GRM is basically useless. You can't do much at all in the way of analysis of the property with this statistic, because it deals with little more than projected rents and market averages. That's shaky ground to stand on when considering the level of investment associated with most multifamily properties.

The bottom line is that this stat uses rough rent data and comps to come up with a decent idea of how much a property is worth. The smart money would say: Identify properties to analyze with the gross rent multiplier — don't think of it as an analysis in and of itself.

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