A quick and easy “back of the envelope” calculation many real estate investors use is Gross Rent Multiplier (GRM). GRM is a simple method to determine whether a rental property is a good investment or not. It allows you to quickly compare properties within a similar area and see which offers the best value for your money. Seasoned real estate investors can probably calculate the gross rent multiplier formula in their heads. However, for new investors asking what is gross rent multiplier or those who want to make sure their calculations are correct, use this gross rent multiplier calculator to ensure accuracy.
Gross Rent Multiplier Calculator:
What is Gross Rent Multiplier?
Gross Rent Multiplier provides a very simplistic look into the long term payoff of a property. This helps determine whether or not it is a good buy. GRM shows how long it would take to pay off the property using just rental income.
Gross Rent Multiplier Formula
The Gross Rent Multiplier Formula is:
Gross Rent Multiplier = Purchase Price of Property / Gross Annual Rental Income
The beauty of the gross rent multiplier formula is its simplicity. If you are analyzing a rental property up for sale, use the listing price (or your potential offer price) and divide it by the property’s gross annual revenue. This would include not just rent, but other income sources such as parking, laundry, utility bill-backs, and any other revenue.
What is Gross Rent Multiplier Calculator Used For?
Gross Rent Multiplier is a quick and easy tool to compare the potential profitability of a rental property. It roughly determines how many years of rental income at current levels it would take to pay off the price of the property. We believe investors use this to compare similar properties when making your purchasing decision.
What Information Will I Need to Calculate GRM?
- Property Asking Price
- Gross Annual Rental Income
To use the Gross Rent Multiplier calculator for an investment property, you will need the purchase (or asking) price of the property and the total expected income (all sources, not just rent) over the course of one year.
How to Calculate Gross Rent Multiplier?
You need to divide the purchase price by the annual income you expect to receive. Use the current rental rate of the property you wish to purchase or complete a rental analysis with nearby comparable properties. In some cases, it makes sense to use “Pro Forma” numbers, which are a projection of the rental income when a buyer is able increase income. Use our simple GRM calculator above or follow the formula for gross rent multiplier here:
Property Purchase Price / Gross Annual Rental Income = Gross Rent Multiplier (GRM)
You must remember that this calculation does not factor in expenses such as depreciation, property taxes, insurance, or repairs. In fact, all expenses are left out of the gross rent multiplier formula. GRM is a simple way to estimate the rate of return on a property, and make an educated decision about whether to further explore making the purchase.
Calculating GRM – An Example
Suppose real estate investor Brian is interested Rental Property A currently listed at $620,000. Total monthly income from all sources is $2,800. This means his annual rental income would be $33,600.
Gross Rent Multiplier = $620,000/$33,600 = 18.45
Brian also sees another comparable property down the street listed for $680,000, but rental income is currently collected at $3,400 per month.
Gross Rent Multiplier = $680,000/($3,400 x 12) = 16.67
While property B looked more expensive up front, it has a lower GRM and may represent a better value.
However, another investor, Kim, learns that the rental income at property A is lower because the current tenants have not been paying rent in full or on time. Kim thinks that she can find more reliable tenants by using tenant screening software such as RentPrep or ApplyConnect. She can also make it easier for tenants to pay rent on time by switching to an online rent payment service like Avail or PayRent. Kim determines she can increase monthly rental income to $3200 per month. This would lower property A’s GRM, potentially making it more attractive to Kim.
Gross Rent Multiplier = $620,000/($3,200 x 12) = 16.15
While gross rent multiplier is a great starting point, an experienced real estate investor will dig deeper into the numbers to understand more about the property she is interested in buying.
Remember the formula for gross rent multiplier uses annual rental income. If you only know the monthly rent, you can enter that and our gross rent multiplier calculator will convert that for you.
Gross Rent Multiplier: Takeaway
Gross Rent Multiplier (GRM) is a popular metric that real estate investors use to compare the value of a property relative to other investment choices in a particular area. If the GRM is higher than other similar properties in the area, it may be overvalued. However, if it is significantly lower than comparable properties, it may indicate a problem with the property or ability to collect the advertised rents, thus reducing its value.
Note also that the gross rent multiplier will vary from region to region. For example, in areas where property prices are high, GRM will be higher than the GRM in lower cost regions. Therefore, it is more valuable to use gross rent multiplier to compare properties within the same area, rather than as a number on its own.
It is also important to look at other operating costs associated with the property. A low GRM property may signal that the property requires significant maintenance or additional upfront repairs.
Before making a decision to buy a rental property we suggest also using some or all of our other real estate investing calculators such as this Cap Rate Calculator.
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