What is a Good Gross Rent Multiplier?
Beginning to look at investing in real estate can be an intimidating process.
In the following series, we will take a look at easy calculations investors can use to determine whether or not a property is a “good” investment. This is part 1 of 4.
The gross rent multiplier (GRM) is a screening metric used by investors to compare rental property opportunities in a given market, or across various markets. The GRM functions as the ratio of the property’s market value over its annual gross rental income. Gross rent multiplier can also be referred to as “gross revenue multiplier,” which is indicative of revenues generated by more than just rent (e.g. laundry, parking, storage, etc).
How to calculate GRM?
Let’s take a look at the gross rent multiplier formula. This formula shows you how to calculate the GRM for a rental property:
Gross Rent Multiplier = Fair Market Value ∕ Gross Rental Income
Example: $300,000 Fair Market Value ∕ $36,000 Gross Rental Income = 8.3 GRM
Remember that Fair Market Value isn’t necessarily the list price of a property. It’s the price that you pay for said property, so negotiating a reduction will score you a better GRM.
what’s a good grm?
A “good” GRM depends heavily on the type of rental market in which your property exists. However, you want to shoot for a GRM between 4 and 7.
A GRM of 7.5+ for a particular investment property might not seem “too high” depending on the market.
GRM can also fluctuate depending on other factors such as location and type of property.
There will likely be a consistent range in which the GRM will occur for Class A properties and a different range for Class C properties. Class A properties typically carry lower operational risks because they are well maintained, well located, and with higher credit tenants. They will cost more to acquire relative to gross rents versus Class C properties.
rule of thumb
Higher GRMs equate to potentially less risk and higher appreciation.
Lower GRMs equate to potentially more risk and cash flow.
pros of using grm
Quick comparison of multiple properties with similar characteristics in different markets
Easy formula to use
Useful screening tool when looking at multiple properties
cons of using grm
Fails to consider operating expenses
Doesn't account for taxes, vacancy rates or insurance
Erroneously understood to measure the time it would take to pay off a building
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