How To Calculate Gross Rent Multiplier
As stated in our previous article, Gross Rent Multiplier (or GRM) provides a ratio real estate investors can generally use to test the market value of a rental income property compared to comparable rental income investment properties in the area.
For example. If Property A has a GRM of “X” compared to similar properties with a GRM of “Y”, the investor can quickly determine that Property A is not in line with the market. Which, depending on whether or not a GRM of “X” is lower or higher than “Y”, might be good or bad.
Okay, enough of the XYZ’s, let’s look at the calculation and consider a more substantnitive example.
Gross Scheduled Income & Sale Price
The GRM calculation requires just two components: Gross Scheduled Income (GSI) and Sale Price (or market value of the property). The Sale Price is somewhat self-expanatory, so let’s consider GSI.
GSI is the gross scheduled income (total projected income) from all rent revenues collected annually. For example, if a triplex is collecting $800 on each unit the GSI would be $28,800 ($800 X 3 = 2,400 X 12 = 28,800). So it’s not a difficult formula, but here’s the catch. The GSI must reflect the annual income scheduled for collection as if the units are 100% occupied. That is, even when there are vacant units, a rent amount for the vacant units (usually a market rent) must be included for the GSI computation. In other words, if our triplex has one vacancy and we assume that the market rent (the most-likely rent based on current market conditions) is $850, we would calculate the GSI to be $29,400 ($800 + 800 + 850 = 2,450 X 12 = 29,400).
That said, let’s take a look at the calculation.
How To Calculate GRM
Gross Rent Multiplier = Sale Price / Gross Scheduled Income.
For example, let’s assume our triplex has a Sale Price (most-likely market value) of $294,000, rents of $800 per month, and one vacant unit that we reasonably feel can be rented for $850 per month. We compute the GSI ($29,400 from our previous example) and then we divide the Sale Price ($294,000) by the GSI ($29,400). The result: 10.00 ($294,000 / 29,400 = 10.00).
In other words, based on all our reasonable assumptions, we now know that our triplex has a GRM of 10.00. Of course this alone means very little. So next time we will discuss how that ratio gets used in real estate investing circles. Stay tuned.
Author: James Kobzeff, August 24th, 2006
