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Gross rent multiplier is a measurement used by real estate professionals to judge the profitability of income-producing rental properties. It is calculated by taking the sale price of the property and dividing it by the potential rental income of the property. This value can be calculated at a monthly or yearly level and is used to assess properties in one area with those in the same in area. When comparing the gross rent multiplier, or GRM, of two properties, the property with the lower GRM has more potential for profit.
Investors in real estate need to know whether they are getting a good value from the capital that they invest in properties. As such, they need some sort of determining factor to decide on the relative value of properties in the same area. While it does have some limitations, gross rent multiplier is a good measuring stick because it gives investors a quick idea of how profitable a specific rental property can be.
As an example of how to calculate the gross rent multiplier, imagine that a real estate investor targets an apartment building that has a sale price of $400,000 US Dollars (USD). For that property, the income that would be gained in a single month if all rooms were occupied, also known as the gross rental income, is $8,000 USD. To calculate the GRM, the $8,000 USD is divided into the $400,000 USD. The resulting value of 50 is the monthly GRM for that property.
Taken at face value, the gross rent multiplier is a quick way to judge properties in the same area against one another. A property holding a GRM lower than another property could be considered the more profitable of the two. There are limitations to this quick judgment, though. For example, GRM does not take into account differing operating expenses of distinct properties, nor does it factor vacancy totals into the equation. Both of these issues could significantly affect profitability.
Used in reverse, gross rent multiplier can help an investor judge the fair value of a rental property. For example, imagine that a property's potential gross rental income for a month is $5,000 USD, and the average GRM for properties in the surrounding area is 60. An investor can invert the GRM equation and multiply 60 by $5,000 USD, arriving at $300,000 USD. Thus, $300,000 is an estimate of the value of the property, and the investor can judge this total against the seller's asking price to see if the property is worth buying.