How to Use the Gross Rent Multiplier Formula
Real estate investors work with agents who are less likely to assist you with holistic market value calculations and analyses for properties.
Getting the highest ROI for your rental property is not the easiest thing to do. Among the most important calculations you’re going to miss out on is the gross rent multiplier (GRM). Ironically, the GRM can be calculated easily, which is why you shouldn’t make decisions entirely based on your findings here.
Since you were looking for an initial value assessment, the GRM tool is an excellent option. You see, this easy calculation alone can determine whether a more detailed analysis is worth your time and resources.
Most property investors, who actively seek properties, have quite a few marked on their radar. This is why they NEED a way to swiftly rank their prospects while freeing-up more time to analyze their few best options. There are also a few smart additions you could add to your apartments to attract more residents.
Enter the gross rent multiplier.
If used correctly, the GRM formula aims to minimize your prospects in the traditional sense of the ‘shortlisting’ strategy. However, property managers usually discourage investors from relying too heavily and forgetting to sift through properties that may have better GRMs.
Methodology Example #1
To calculate the GRM of a property that is up for grabs, you need to input the following variables into the equation accordingly:
Market Value / Annual Gross Income = Gross Rent Multiplier
For instance, if a property is being sold for $750,000 and provides for an annual income of $110,000, then its GRM equals 6.82.
How to Calculate GRM to Estimate the Value of Property
Let’s say, for instance, that you are analyzing sold properties (comparable classes) and calculated their GRM to be 6.75. What if, now, you wish to estimate the value of the property you are trying to purchase?
Assuming that the expected gross rental income of the property is $68,000 per year, here’s how your equation will work:
6.75 (GRM) x $68,000 (Annual Income) = $459,000 (Market Value)
Now if you find out that this property is listed for a price of $695,000, you can swipe on forward and not waste your time here.
Cap Rate vs. Gross Rent Multiplier
Commercial real estate and rental incomes are evaluated with the help of your investment criteria and a number of ratios. This is why many property investors tend to confuse the capitalization rate (cap rate) with GRM.
The cap rate of a property can be calculated by determining its net operating income (NOI) and then dividing it by its current market value.
Unlike the GRM, a property’s capitalization rate incorporates operating expenses and vacancies. In other words, the cap rate is a more accurate calculation of worthy investment as compared to the GRM.
Of course, when an investor is still in the initial stage of research, they wouldn’t have expense and occupancy rate data on hand. This is why the GRM formula can quickly eliminate potential property investment options, while also freeing up time and resources to estimate more holistic data.
Investment Property Example #2
Let’s assume you’re planning on buying real estate that has a listing price of $205,000. You also find that the monthly rental income of this property is $1,541.
GRM = $205,000 / ($1541 x 12) = 11.09
Is This Number Good?
If you’re a math whizz, you might have determined that a lower GRM reflects a faster breakeven on your initial investment. Of course, you may be wondering how much of a GRM is a realistic goal and how much may be too high?
Well, most experienced property managers are of the consensus that an investment property that has a GRM of anywhere between 4 and 7 is ideal.
Based on what you’ve learned, if you’re faced with the option of choosing between Example #1 and Example #2, which one would you pick?
We really hope you think #1.
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Author: Katie Lukina
Head of Content @Goodjuju