Want to run some back-of-the-napkin numbers on a rental investment? Or find your next city for long-distance real estate investing? Use gross rental multiplier (GRM) for a quick answer.
Gross rent multiplier offers a simple glimpse into the profitability of any investment property or city. Real estate investors can use a myriad of methods to value properties or forecast rental income. What makes gross rental multiplier unique is its speed and simplicity, which allow you to also use it to analyze and compare cities.
That simplicity comes at a cost however, as GRM makes a blunt instrument. Make sure you understand not just its uses, but also its limitations before relying too heavily on it.
What is Gross Rent Multiplier (GRM) in Real Estate?
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 makes a quick shorthand to calculate rental profitability. But it ignores all rental property expenses, which vary wildly across states, cities, neighborhoods, and properties.
How to Calculate GRM
To calculate GRM is quite simple. The formula is as follows:
GRM = Price of Property/Gross Annual Rental Income
Say Sam has his eyes on a property that costs $300,000. 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 for how long it will take a property to pay for itself. In this example, it will take 8.3 years for Sam to pay off the property. Bear in mind that the GRM formula does not include other rental expenses such as property taxes, vacancy rate, and insurance.
Yes, GRM is one of the easiest calculations in real estate investing. But that doesn’t mean a free GRM calculator wouldn’t make your life easier.
Bookmark this page to use our free GRM calculator any time.
Remember, a lower GRM means it would take fewer years for a property to pay for itself (on paper at least). Lower is definitely better for gross rent multiplier!
Uses of Gross Rent Multiplier
In addition to providing a quick price/rent ratio for a prospective property, GRM comes with a few other uses.
It helps 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, and the typical GRM for the neighborhood: the number of years it typically takes to pay off area properties. With that information, he can calculate and identify what a fair 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 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 price of the property. This calculation determines a fair renting price.
$300,000 Property Value / 8.33 GRM = $36,000 Rental Income
By taking the price of the property and dividing by the years that the property should pay for itself, Sam is given an estimate to 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.
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 30 years!
To help you find better markets for real estate investing, we calculated the GRM for the top 100 most populous cities in the US:
Would your readers enjoy this interactive map of America's top 100 cities' GRM? Click here for the embed code.
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Limitations of GRM
Although the gross rent multiplier is a quick and easy way to determine the property value, it comes with some drawbacks. Most importantly, GRM does not account for variations in your expenses as a landlord, such as:
- Property insurance
- Property Taxes
- Maintenance and rRepairs on theto a property
- Property mManagement fees
- Vacancy rate
- Maintenance on property
- 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 over, 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 suffers from double the crime rates of Area 1.
After running the numbers through a property cash flow calculator, he discovers that the typical property in Area 2 produces a higher average yield than properties in Area 1, despite the higher GRM.
What Is a Good Gross Rent Multiplier?
Generally speaking, the lower the GRM at purchasing price- the better for property level investments. However, as mentioned prior, gross rent multiplier does not solely offer enough information to gage a property’s returns.
While lower GRMs are more attractive to rental investors, it is difficult to place a specific number on a “good” GRM.
In some of the best cities for real estate investing, you might 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 in premier neighborhoods GRMs could triple that.
Always take GRM with a grain of salt, and use it as a first-glance way to screen cities and properties, not your only form of due diligence in real estate.
Gross rent multiplier is a great way to quickly glance at a property’s value when scanning potential property investments.
However, it doesn’t account for your expenses as a landlord, 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?