Gross Rent Multiplier
|This article does not cite any references or sources. (December 2009)|
Gross Rent Multiplier or "GRM" is the ratio of the price of a real estate investment to its annual rental income before expenses:
Gross Rent Multiplier (GRM) = Sale Price / Potential Gross Income
The GRM is useful for comparing and selecting investment properties where operating costs can be expected to be uniform across properties. In other words, the more homogeneity of the sales and subject, in terms of age, quality of construction, style, condition, etc., the higher potential there is for accuracy. Historically, the GRM was used primarily for 2-4 unit properties.
In this case, a property value may be estimated using the following related formula:
Sale Price = Gross Rent Multiplier x Potential Gross Income
It is important to beware of the limitations of the gross rent multiplier. For some properties, gross rents may include funds that a landlord must spend on utilities, while the tenants of other buildings may pay for utilities themselves. Various property-specific items are not captured when using the GRM. If one property has higher taxes or higher vacancy than the next, then using the GRM to calculate values will be deceiving.
Another caution is if you derive a multiplier from a sale where the rents were at market rates, then it should be applied to your subject's market(forecast) rates. If the above multiplier were applied to your subject's below-market rates, it would yield a below-market value for your subject.
The common measure of rental real estate value based on net return rather than gross rental income is the Capitalization Rate or Cap Rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return. A similar multiplier to the GRM derived from net return would be the multiplicative inverse of the Cap Rate.