The gross rent multiplier (GRM), calculated as GRM = property price ÷ gross annual rent, is a simple way to assess a property’s profitability. It does this by comparing a property’s price to its gross annual rent, then checking how it stacks up against similar properties in the same market.
If you’re making your first foray into real estate, or you just want to make sure a potential rental property has serious earning power, the gross rent multiplier (GRM) is a quick way to compare a property’s price to its annual gross rental income.
You might also see the gross rent multiplier formula referred to as GIM, or gross income multiplier. They both refer to largely the same formula, but many investors use GIM to also account for sources of income aside from just rent, such as tenant-paid laundry services or snack machines on a property.
In this guide, we’ll define gross rent multiplier, show you the GRM formula, and explain how to use it alongside other metrics like cap rate to evaluate deals faster.
- How to calculate GRM
- What is a good GRM?
- GRM vs. the cap rate
- The pros and cons of GRM calculations
- FAQs
How to calculate GRM
Once you know the property’s purchase price and its expected rent, calculating GRM is straightforward. First, total up the property’s gross rent for the year (monthly rent × 12). Then divide the property price by that annual rent:
GRM = Property Price ÷ Gross Annual Rental Income
In the formula, the property price is the selling price of the property in question, and the gross annual rental income is how much money you would make in a year from rent on the property.
Let’s say you’re looking at a property listed for $400,000, and the gross annual rent (monthly rent times 12) would be $35,000.
$400,000 / $35,000 = 11.42
For the sake of simplicity, lets round that down to 11.4. A single GRM doesn’t mean much without context, but you should always look for a lower number. If 11.4 was the lowest number of a selection of similar properties in a similar market, then it might be worth exploring the property. But, if you find other properties with GRMs lower than 11.4, those properties most likely have a higher earning potential.
GRM example chart
These numbers are illustrative; GRM ranges vary widely by market.
|
All else equal, Home A has the lowest GRM (5.0), meaning you’re paying less per dollar of gross rent—so it could be a stronger candidate to analyze additional factors (expenses, vacancy, repairs, and local rent comps).
What Is a Good Gross Rent Multiplier?
GRM only makes sense when it’s compared to similar properties in the same market. Some sources cite a “good” GRM as being around 4 to 7, but the right range depends on local home prices and rents.
In simple terms, a lower GRM means the property’s price is lower relative to the rent it brings in each year. GRM is often used as a rough way to estimate how many years of gross rent it would take to equal the purchase price (before expenses).
A good GRM on a cheaper property, however, doesn’t necessarily mean you’ve struck gold. GRM is a rough estimate, and it’s wise to have the property inspected and appraised before you close so you know what to expect in repair and maintenance costs. Buying a cheap property, even one with a good GRM, could mean that excessive repairs and maintenance will eat into your profit.
Should you invest in a rental property, easily monitor all rental-associated costs by tracking your expenses with Apartments.com.
Our platform can help you summarize rental expenses by property and tax category. From there, you'll be able to export them to CSV or PDF formats to make keeping track of costs quick and simple.
Difference Between GRM and Cap Rate
The cap rate, or capitalization rate, and GRM are often associated with each other and frequently thought of as the same calculation. The two are quite different though.
The GRM formula uses gross rental income. That is rental income before any operating expenses such as repairs, maintenance, utilities, etc. The cap rate uses the net operating income, or the amount of income after these expenses.
GRM is great for making a quick assessment on the earning potential of a property. The cap rate should be used after you’ve scrutinized a property in more detail and had its monthly costs projected. This way you can estimate how money much you’ll be taking in every month.
Pros and Cons of GRM Calculation
The gross rent multiplier can sound like a strange concept before you grasp how simple of an equation it is. And with so many applications you might feel like a real estate expert on the rise, but what are the pros and cons of the gross rent multiplier formula?
Pros
GRM is a simple equation to understand. Once you know the terms involved, GRM is quite simple to calculate and apply.
GRM is easily understood. Almost anyone in the real estate business will understand the concept of GRM, so working with investors or property managers should be simple when they know what you’re looking for.
GRM is easily applied to other properties. The GRM for similar properties in a similar market is almost always the same. So, once you know the GRM for one property, you can get a good understanding of the area as a whole.
Cons
GRM does not account for depreciation. The GRM only takes into account the current market value for a home. As the market changes and your home depreciates or appreciates, the GRM must be recalculated.
GRM does not account for expenses. The GRM formula only uses gross rental incomes. It doesn’t account for expenses, maintenance, taxes, or vacancies. Those can only be projected when you assess and inspect the home (or similar properties).
Math may not be everyone’s cup of tea, but thankfully the GRM equation is a relatively simple way to understand a property’s earning potential.
Whether you’re a real estate mogul or you’re just starting to look for your first investment property, the gross rental multiplier will become one of your best tools as you look for a diamond in the rough of rental properties.
Taking the Next Steps
Now that you know how a gross rent multiplier works, use the GRM formula to quickly screen properties, compare similar rentals, and spot deals that deserve a deeper look.
When you're ready to list your rental, Apartments.com Rental Manager has you covered from A to Z with tools to help landlords advertise rentals, collect rent payments, track income and expenses, and much more—at no cost!
FAQs
What is gross rent multiplier (GRM)?
Gross rent multiplier (GRM) is a quick rental property metric that compares a property’s purchase price to its gross annual rental income (before expenses). It helps investors estimate whether a property is priced high or low relative to the rent it can generate.
How do you calculate gross rent multiplier?
To calculate gross rent multiplier, use this formula:
GRM = Property Price ÷ Gross Annual Rent
Example: If a property costs $300,000 and brings in $30,000/year in gross rent, the GRM is 10. A lower GRM generally means you’re paying less per dollar of rent (though you still need to evaluate expenses and vacancy).
What is a good gross rent multiplier?
A good gross rent multiplier depends on your market, property type, and rent stability. In general, a lower GRM can indicate better value, but it isn’t always better if the property has high expenses, frequent vacancies, or deferred maintenance.
Originally published on November 2, 2020 and has been updated.
