What is the Gross Rent Multiplier?
An ode to GRM - one tool in your real estate kit.
In an effort to hone my skills in real estate, I’ll be dedicating periodic posts to terms and concepts in the space.
This is the first in this series: the Gross Rent Multiplier!
What is it? The Gross Rent Multiplier is simply a ratio to evaluate a property and compare in a common framework.
What’s the formula? It’s the property price / annual gross rental income
The property price is the price you pay. “Annual gross rental income” just the entire amount you will get from your tenant (be they commercial or an individual renter) for the year before accounting for expenses.
Example: You're evaluating a duplex and it's worth an estimated $200k, and you expect to get about $1.5k a month for it. What's the GRM?
Answer: Well it is $200k / $18k (the annual rent) = 11.11 Gross Rent Multiplier.
SO…is that good or bad?
According to Larry Loftis in his book "Investing in Duplexes, Triplexes, and Quads" he says:
0-7: Typically not good neighborhoods
8-11: Ideal range
12-18: Cautious potential
17-20: Lucky to have positive cashflow (more appreciation)
20+: Hot property, not a cashflow play
Another framework from Trion Properties states, "A good rule of thumb is the lower the GRM, the more potentially lucrative the deal. Class B and Class C properties in secondary or tertiary markets will usually have a lower GRM than Class A properties or properties located in primary, core markets."
When do you use this? It’s a good way for a “quick look” at a property. There’s a lot of sites that will tell you it’s a method to seeing how quickly you can pay off a property, but the devil is in the details (as you’re not taking into account expenses) and you can get burned. It shouldn’t the sole number you use, but it’s a useful term to know!
