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.

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.

Anyone that has been around income property long enough has surely heard of gross rent multiplier. Or perhaps seen it used in an APOD or other investment report characterized simply as GRM.

So what is gross rent multiplier? It’s a method that tells the investor the ratio between the price of the rental property and the rental property’s gross scheduled income. In other words, it tells the investor the property price based upon each $1 of annual gross possible income.

GRM has the advantage of being a very easy ratio to calculate (you can probably do it in your head). However, the results of the calculation are only useful if it can be compared to similar information taken from comparable properties. For example, just knowing that a property has “X” GRM means little by itself. However, when it can be compared to a similar property that has “Y” GRM, it can reveal something about the market value of an income property and whether or not the subject property is priced right or not.

Other than ignoring the time value of money, the primary disadvantage of GRM is that it does not consider operating expenses. Keep in mind that GRM concerns rental income (the top line of the income statement) before any adjustments are made for property taxes, maintenance and repairs, and other operating expenses.

You will be shown how to calculate GRM and the best way to use it in an upcoming article. Please stay tuned.