The gross rent multiplier is a measure of the demand for rented property in an area. The higher this number, the more demand there is for rental properties. We calculate it by dividing the median house price by the gross annual rent for that property type.
What is the gross rent multiplier?
The gross rent multiplier (GRM) is a real estate valuation measure that’s often used to quickly compare one property to another. It’s calculated by dividing the selling price of a property by the gross annual rental income and is expressed as an overall number or ratio.
Many landlords, real estate agents, and potential real estate investors use GRM to compare rental properties. The gross rent multiplier was first used in the 1930s to help determine the property value when tax assessments could not be completed.
The gross rent multiplier is the total selling price of a property divided by its gross annual rental income.
Why do I need to know the GRM?
A gross rent multiplier (GRM) is a real estate term used to find out how much you can potentially earn on an investment property. The formula is simple: taking the selling price of a property and dividing it by the gross annual rental income. If a seller is asking $500,000 for their home and they’re currently renting it out for $50,000 per year, then their GRM would be 10 ($500k/$50k).
Real estate investors use GRMs to compare rental properties so that they can make quick decisions about which ones are undervalued and should be bought. They also find them helpful in determining whether or not an offer made on another property was fair given its current market value and other factors like location and condition factors (like repairs needed).
How do you calculate the gross rent multiplier?
The gross rent multiplier is one of the most important ratios real estate investors use to determine whether or not to buy a property. It’s also useful for landlords and real estate agents. The GRM shows how many years it will take for you to break even on your investment in a property.
To calculate it, you divide the total selling price of your property by its annual rental income:
\text {Gross rent multiplier} = \frac {\text {Property price}}{\text {Gross rental income}}For example:
\frac {\$3,000,000} {\$300,000} = 10 \text { years}This means that at this rate if you sell the building after 10 years, you’ll have made back what you spent on buying it in the first place (assuming there’s no depreciation).
What is a good GRM?
If you’re a landlord, it’s important to remember that your gross rent multiplier (GRM) is just one indicator of whether you’re charging the market price for your rental units. As a general rule, the lower the GRM, the better. Every market has its own averages, however, so check with an appraiser or real estate broker to get an idea of what different numbers mean in your area.
FAQ
How do you calculate a gross rent multiplier?
In order to determine the gross rent multiplier, you would divide the price of the property by its gross rental income.
What is a typical gross rent multiplier?
The 1% rule states that gross monthly rents should be equivalent to at least 1% of the purchase price.
Why is the gross rent multiplier important?
Think of it as your ‘break-even point’ or the time it takes to earn back what you invested in the property. The GRM creates an “apples to apples” comparison when looking at other investment properties on the market.
