The gross rent multiplier is a simple computation that uses gross yearly rental income in order to determine the prospective income of identical properties in a similar market. Market rents change quickly and the GRM formula is an excellent financial statistic to utilize. Moreover, GRM or Gross Rent Multiplier is the ratio of a value or price of a property to the gross rental income.
What are the Uses of Gross Rent Multiplier?
Gross Rental Multiplier is a good and useful formula in order to determine the value of the property’s gross earnings. There are possibilities that for instance, two equivalent properties may have a $310,000 fair market value each and the one with the lowest Gross Rent Multiplier may have the highest value since the GRM stream is much bigger. Moreover, GRM can also be used in order to track some changes with regard to the property value which is based on gross rentals. Furthermore, when your Gross Rent Multiplier is greater than the other comparable properties, it is a sign that you probably should boost the rents for a reason that the gross rental income is too low.
How to Calculate a Gross Rent Multiplier?
The monthly revenue of gross rental or the yearly rent can be used to determine Gross Rent Multiplier (GRM). There are a lot of investors of real estate who employ Gross Rent Multipliers based on the rent every month, and Gross Rent Multipliers based on yearly rent are becoming more frequent. All you have to do is to divide the property value by the estimated gross rent to be able to find the gross rent multiplier for a specific property. The GRM will result in a hundred (100) if a house is sold for around 200,000 dollars which therefore might be reasonable to expect that it will bring around 2,000 dollars monthly in rental revenue.
What is the Formula of Gross Rent Multiplier?
The formula for Gross Rent Multiplier can be seen below.
Property Value or Price
GRM = ——————————————–
Gross Rental Income
Property price simply means that it is the price or the value of the property when it is for sale on the market. On the other hand, when it comes to Gross Rental Income, one should know and be knowledgeable with regards to the estimated yearly gross rental income. And also, it is important to keep in mind that the Gross Rent Multiplier could not be used to anticipate how long it would take to be able to pay off property since other factors also play a role.
What is the Calculation Example of Gross Rent Multiplier?
Say, for example, there is a three-unit property that is a multi-family type of unit. The property yearly earns around $45,000 and the price of the property is around $310,000 per unit, therefore, the Gross Rent Multiplier would be 6.89.
Here is an illustration of how to get the GRM and come up with 6.89. $310,000 (Property price) divided by $45,000 (Gross Rental Income) equals 6.89 GRM.
What is Considered a Good Gross Rent Multiplier?
The rule of thumb when it comes to Gross Rent Multiplier is that the lower the Gross Rent Multiplier, the more advantageous the deal could be. In simple terms, the lower, the better. The Gross Rent Multiplier of B and C properties in tertiary and secondary markets is typically lower than that of property A or properties in main markets. Gross Rent Multiplier should be effectively used to examine assets in the same market that are in the same condition as well.
What are the Advantages of Gross Rent Multiplier?
The following are the advantages of Gross Rent Multiplier (GRM).
- Easy to use: It requires just a simple computation when it comes to comparing similar homes in the same market.
- Simple and straightforward: It offers a simple and straightforward technique for valuing rental properties which may also be used by new investors of rental properties.
- Good Screening Technique: It has a good screening technique when it comes to assessing whichever real estate investment opportunities have the most potential.
- Focused on rental income: Instead of focusing on the price of the property or property value, or price per unit, Gross Rent Multiplier focuses on the rental revenue generated.
- Can be used by both the seller and the buyer: The GRM, gross rent multiplier can also be used by both the sellers and the purchasers in order to determine the worth of a rental property. A seller who has a totally upgraded home that is rented to excellent tenants, for instance, may have a greater asking price as well as a lesser GRM. On the other hand, buyers who are searching for a bargain will seek properties with a lower Gross Rent Multiplier (GRM) since the cost could be under market or the gross rental income is greater.
What are the Drawbacks of Gross Rent Multiplier?
Below are the drawbacks or the disadvantages of a Gross Rent Multiplier.
- Operating expenses not considered: This is the most significant drawback of the GRM method as it does not account for operating expenditures. This implies that other expenditures such as regular repairs as well as other things that need to be fixed or maintained are not factored into the computation, making the property appear more valued than it is.
- Does not take lost rental revenue into account: Gross Rental Multiplier also ignores missed rental revenue owing to vacancies caused by natural tenant turnover or a badly kept property that takes longer to rent than usual.
- Expectations when it comes to payments: There are investors who believe that the Gross rental multiplier calculates the time it takes in order to pay for a house or property, but it actually analyzes the gross rental income created and collected to the value of the property.
What are the other Metrics in Real Estate Investing similar to Gross Rent Multiplier?
There are other metrics in Real Estate Investing that are similar to Gross Rent Multiplier (GRM) which can be seen below.
- Cash Flow: Cash flow is a crucial aspect of every property investment assessment. Most investors have a particular goal to achieve when it comes to their cash flow, while on the other hand, some just simply insist on solid cash flow from every rental property they purchase.
- Cash-on-Cash Return: A lot of investors finance their property investment, therefore, a cash-on-cash gain can be beneficial when comparing homes with various down payments or upfront maintenance expenses.
- Cap Rate: The capitalization rate seems to be more beneficial for determining the profitability of property investment for a reason that it examines the property’s net revenue after expenses such as property taxes, insurance, and other costs, rather than just simply the gross income. Moreover, the cap rate is most commonly used to evaluate commercial real estate, although it may also be applied to residential homes.
What is the difference between Cap Rate and Gross Rent Multiplier?
Cap rate is a term that is used in commercial real estate in order to describe the projected rate of such a return on investment. The capitalization rate method is crucial for calculating the percentage return on investment that one investor might expect. While on the other hand, Gross Rent Multiplier is used for estimating the rental property value which is based on gross rental profits earned.
Both the cap rate as well as Gross Rent Multiplier are regularly used by investors in real estate and are sometimes confused as the same thing, yet they are not. To begin with, cap rates are calculated as a ratio of Net Operating Income (NOI) to the value or price of a property, as opposed to the gross planned income utilized in the Gross Rent Multiplier. The cap rate takes into account most of the building operational expenditures, such as grounds, repairs as well as building renovations, as well as utility prices. As a result, the cap rate is a significantly better indicator of genuine property worth than the gross rental multiplier when it comes to evaluating investment success.