Gross rent multiplier (GRM) is a good method to use when comparing various residential income property within a particular rental income market. It’s best used as a precursor to a serious income property analysis, however, because it does ignore operating expenses and time value of money. Nonetheless, it is easy to calculate, and it does offer real estate agents and investors a quick method to do a preliminary survey.

We’ve already discussed the formula, so let’s look at a couple of scenarios where you might want to use it. We’ll assume you did a little research and have a general idea of what a typical GRM is in the local market.

SCENARIO ONE: You’re considering a sale of your residential income property and want to know (based on your local market’s typical GRM) what price you might be able to sell for. So you multiply your property’s gross scheduled income (GSI) by the typical GRM in order to compute it.

Let’s say, for example, that the typical GRM in your market area is 10.0 and the GSI for your subject property is $50,000. You would multiply your GSI by the typical GRM and calculate that your property might sell for $500,000 ($50,000 X 10.0 = 500,000). This may or may not be a price that you’re willing to accept, but more importantly, it didn’t take you long to make a preliminary determination.

SCENARIO TWO: You’re considering the purchase of a rental property for $700,000 and a GSI of $50,000. In this case you would divide the price by the GSI to compute the GRM and get 14.0 ($700,000 / 50,000 = 14.0). Since you know that the typical GRM is 10.0 and the subject GRM is 14.0 (the higher the ratio, the higher the price to rental income), you have second thoughts about the purchase and might not want to spend any more time researching it.

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