If you are a real estate professional, lender or Investor. you will be doing quite a bit of market analysis for each property that you are reviewing. The Gross Rent Multiplier is easy to calculate, but also has its own weaknesses when ascertaining value, which we will explain later in this article. That aside it is still a valid tool in the assessment of investment real estate, and as a barometer for an investor to decide on whether to continue doing additional research on the property.
PRO TIP : If the GRM is way out of the norm and is high or low compared to recent comparable sold properties, it indicates a problem with the property or gross over-pricing.
Getting the value for recent sold properties:
Market Value / Annual Gross Income = Gross Rent Multiplier (GRM)
Property Sold for $210,000.00 / $24,000.00 Annual Income = GRM of 8.75
Estimating Value of Property based on GRM:
Now if you wanted to do an analysis of recent comparable sold properties and found that, like the one above their GRM’s averaged around 8.65. Now you want to approximate the value of a property being considered for purchase. You know the rent income is $18,000.00 annually.
GRM X Annual Income = Market Value
8.65 x $18,000.00 = $155,700.00
Now if it is listed at $200,000.00, you may not want to waste any more time looking at it for purchase.
PRO TIP: Do not become too reliant on this calculation, but it can be used to narrow your search in a large list of prospect properties.
Now as we had previously discussed there are some weaknesses to basing a search on GRM alone. Taking the example of a 8.65 GRM and annual income of $18,000.00. There is a remaining possibility that the current owner of that property may not be collecting market rent, due to poor management, property condition or other factors. If you had only used GRM, you may have skipped a potential investment. GRM also does not factor turnover, property type, and location.
Also keep in mind GRM ignores potential appreciation and other neighborhood conditions. A well informed and intelligent investor factors all of these situations when selecting real estate to invest in.