What Is Gross Rent Multiplier? How to Use GRM in Real Estate

The Big Picture On GRM in Real Estate:

• • Gross Rent Multiplier (GRM) is a straightforward metric that compares a property’s price to its gross annual rental income, offering a quick assessment of potential profitability.
  • While GRM provides a rapid comparison tool, it doesn’t account for operating expenses, financing costs, or property conditions, which are crucial for a comprehensive investment analysis.
  • Investors can use GRM to compare different markets or properties, but they must supplement it with other metrics like capitalization rates and cash-on-cash returns for a well-rounded evaluation.

Sometimes, real estate investors use too many ways to measure returns. Are they all really necessary? What is a gross rent multiplier, and why should investors bother with it?

While a blunt instrument, the gross rent multiplier (GRM) offers an easy, back-of-the-napkin way to compare rental investing markets.

Also referred to as the gross income method (GIM), the gross rent multiplier gives you a simple glimpse into the profitability of any investment property or city. That simplicity comes at a cost, however—GRM ignores factors like operating expenses and investment property financing. Make sure you understand not just its uses but also its limitations before relying too heavily on it.

What Is Gross Rent Multiplier?

The gross rent multiplier is the ratio between the value or price of a property and the gross annual rental income it creates through rent. Put another way, GRM tells you how many years it would take for the gross rental income to pay for the purchase price.

It provides a quick shortcut to calculate rental profitability. However, it ignores all rental property expenses, which vary wildly across real estate markets.

GRM Investment Benchmarks

Although GRM calculations vary by market, experienced investors use benchmark ranges to quickly assess whether a property warrants further due diligence.

Gross Rent Multiplier Formula

Calculating GRM is about as simple as formulas get in real estate. The gross rent multiplier formula reads as follows:

GRM = Property Price / Gross Annual Rental Income 

Hardly rocket science, eh?

Note that “gross rent” means just the total of all collected or potential rent. It does not include operating expenses such as vacancy rate, property taxes, landlord insurance, property management fees, repairs, maintenance, and so on.

Calculate Gross Rent Multiplier: Example

Say Sam has his eyes on a $300,000 real estate investment. The property rents for $3,000/month, for a gross annual rent of $36,000.

$300,000 Property Value / $36,000 Annual Rental Income = 8.33 GRM

What does that mean? The GRM gives an estimate of how long it will take a property to pay for itself. Sam will take 8.3 years to pay off the property in this example. Remember that the GRM formula does not include other rental expenses such as property taxes, vacancy rate, and insurance.

Gross Rent Multiplier Calculator

Yes, GRM is one of the easiest calculations in real estate investing. But that doesn’t mean a free gross rent multiplier calculator wouldn’t make your life easier.

Bookmark this page to use our free GRM calculator at any time.

How to Use GRM in Real Estate Investing

GRM has a few other uses, including providing a quick price/rent ratio for a prospective property.

Many real estate investors use GRM to compare prospective cities and neighborhoods when investing. Some cities offer relatively high rents and low property prices — an attractive proposition. Others feature outrageously high home prices compared to the rents — cities to avoid.

A gross rent multiplier can also help you identify the fair market value of a property if you know the GRM for similar properties in the area. You can invert the formula like this:

Typical Property Value = Rental Income X GRM

Revisiting the example above, Sam knows the gross annual rental income, the typical GRM for the neighborhood, and the number of years it typically takes to pay off area properties. With that information, he can calculate and identify what the current market value for the property would be.

$36,000 Rental Income X 8.33 GRM = $300,000 Value (rounded)

Likewise, you can use the GRM formula to determine fair rent. If you want to determine what the monthly rent should be on a given property, you must know the fair market value:

Rental Income = Price of Property / GRM

In this scenario, Sam knows the GRM and the property’s sale price. This calculation determines a fair renting price.

 $300,000 Property Value / 8.33 GRM = $36,000 Rental Income

By taking the property’s price and dividing it by the years that the property should pay for itself, Sam is given an estimate of what he should make annually from his renters.

But given the bluntness of the GRM, you can’t calculate rental cash flow or property values with any real precision. Instead, put that very bluntness to work for you by using it on a larger scale to identify cities with attractive price/rent ratios.

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Cities with the Best Price/Rent Ratios (GRM)

Expensive coastal cities rarely make good markets to invest in real estate. The properties usually don’t cash flow well, with high price/rent ratios. For example, people love to complain about the high rents in San Francisco, but the simple fact is that home prices are disproportionately higher. San Francisco features a GRM of over 15 years!

To help you find better markets for real estate investing, we calculated the GRM for the top 300 most populous cities in the US:

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For more, check out this real estate heat map to find the US’s hottest (and coldest) markets.

Limitations of GRM

Although the gross rent multiplier is a quick and easy way to determine the property value, it has some drawbacks. Most importantly, GRM does not account for variations in your expenses as a landlord, such as:

1. 1. Property insurance
   2. Property Taxes
   3. Maintenance and repairs on the property
   4. Property management fees
   5. Vacancy rate
   6. Maintenance on property
   7. Legal and ownership expenses

These expenses vary sharply from one neighborhood to another and from one city to another. For example, property taxes in one city could be a small fraction of those in the next county or many times higher. Or, in two adjacent neighborhoods, crime rates could be double in one compared to the other, driving demand down and repair and turnover costs up.

An easy example: Sam is trying to decide whether to purchase a property in Area 1 or Area 2. Area 1 has a GRM of 9, and Area 2 has a GRM of 12. At first glance, Sam thinks that Area 1 looks more attractive. However, Sam soon realizes that Area 2 has double the crime rates of Area 1.

After running the numbers through a property cash flow calculator, he discovers that despite the higher GRM, the typical property in Area 2 produces a higher average yield than properties in Area 1.

What Is a Good Gross Rent Multiplier?

Generally speaking, the lower the GRM at the purchasing price, the better for property-level investments. However, as mentioned previously, the gross rent multiplier does not provide enough information to gauge a property’s returns.

While lower GRMs are more attractive to rental investors, assigning a specific number to a “good” GRM is difficult.

In some of the best cities for real estate investing, you might have GRMs under 8. In the worst, you could see a GRM over 30!

Even within cities, expect a wide range of GRMs. In high-crime, high-vacancy, low-rent areas, you might see GRMs as low as 4 or 5, while GRMs could triple that in premier neighborhoods.
Always take GRM with a grain of salt. Use it as a first-glance way to screen cities and properties; it is not the only form of due diligence in real estate.

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Difference Between GRM & Cap Rates

Capitalization rates (cap rates for short) are one way to measure the return on investment on an income property. You calculate a property’s cap rate by dividing the net operating income (NOI) by the property price or value.

Net operating income is the gross annual income minus all operating costs, such as vacancy rates, repairs, maintenance costs, property manager fees, insurance, and property taxes. Because cap rates include expenses, they offer a more accurate measure of potential investment properties’ returns.

Neither GRM nor cap rates take investment property financing into account. That removes debt service from the equation, which isolates the income potential of different markets or properties.

Both cap rates and GRM can be screening tools to scout potential rental markets and investment opportunities. While GRM applies more to residential properties, cap rates apply to all property types.

Difference Between GRM & Cash-on-Cash Return

While GRM is a blunt financial metric, cash-on-cash return is more precise for specific properties.

Cash-on-cash return is the annual yield you earn on your own cash invested in an income-producing property. Only your invested cash: your net annual income divided by the cash you invested in the property.

Unlike cap rates and gross rent multiplier, cash-on-cash return takes your mortgage payments into account. If you invested $50,000 in closing costs and your down payment on a rental property, and the property generates $5,000 per year in net income, you earn a 10% cash-on-cash return.

Commercial property investors also use cash-on-cash returns to measure income yield on real estate syndications.

It offers one more rate of return metric to help you measure potential income. For more details, check out our free cash-on-cash return calculator and, while you’re at it, our internal rate of return calculator.

Strategies to Enhance Your GRM Performance

Most investors focus solely on using GRM as an evaluation tool, but you can actively work to improve this metric for your properties. The math is simple: either increase your rental income or decrease your property’s market value. While lowering your property’s value defeats the purpose of investing, several strategies can help boost your rental income without significantly impacting property value.

Start with your rental rates. Research comparable properties in your area and ensure you’re charging market rates. Many landlords leave money on the table by underpricing their units. For instance, if you’re charging $1,500 for a property worth $200,000 (GRM of 11.1), raising the rent to $1,700 would improve your GRM to 9.8, which makes your property more attractive to future investors.

Consider value-added improvements that can justify higher rents without proportionally increasing your property’s market value. Installing washer/dryer hookups, updating kitchen appliances, or adding central air conditioning often allows for rent increases that outpace the improvement costs. For instance, a $5,000 kitchen upgrade might allow for a $100 monthly rent increase.

Don’t overlook additional income opportunities, too. Converting unused space into storage units, adding paid parking, or installing vending machines can increase gross rental income without significantly affecting your property’s market value. A property generating $2,000 monthly in base rent plus $200 in additional income streams will have a better GRM than one solely relying on base rent.

Frequently Asked Questions About GRM in Real Estate

Of course, understanding GRM better helps you make smarter investment decisions. Therefore, here are the most common questions investors ask about this metric.

What property types work best with GRM analysis?

GRM works best for residential properties, particularly single- and small multi-family properties. Due to their more complex income structures, commercial properties typically rely more on cap rates.

How often should I recalculate my property’s GRM?

Review your GRM annually or whenever market conditions significantly change. This helps you stay competitive with local rental rates and maintain optimal property value.

Does property condition affect GRM?

Although GRM doesn’t directly account for property condition, it indirectly impacts potential rental income and property value. A well-maintained property typically commands higher rent relative to its value, potentially leading to a better GRM.

Can GRM predict future property performance?

GRM alone cannot predict future performance, as it doesn’t account for market trends, property appreciation, or changing expenses. For a more comprehensive analysis, use it alongside other metrics like cap rate and cash-on-cash return.

Should I entirely avoid properties with high GRMs?

Not necessarily. Some markets, particularly those with high appreciation potential, naturally have higher GRMs. Over the long term, a property with a GRM of 15 in a rapidly appreciating market might outperform a property with a GRM of 8 in a stagnant market.

How does GRM compare across different markets?

GRM varies significantly across markets. A “good” GRM in San Francisco might be considered poor in Detroit. Always compare GRMs within the same market rather than across different cities.

Final Thoughts

Gross rent multiplier is a great way to quickly assess a property’s value when evaluating potential property investments.

However, it doesn’t account for your expenses as a landlord or property investor, which makes it a blunt instrument. When seriously considering purchasing a property, complete a full analysis of cash flow and other returns to make the best possible financial decision.♦

How do you use GRM in your real estate investing decisions?

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