What is Gross Rent Multiplier (GRM) in Real Estate Investing?
If you’re looking to purchase an investment property, there are several factors you’ll likely consider as you start your home search. Is the property in a good neighborhood? What type of improvements needs to be made? How much can I rent the units out for?
One of the main ways to determine the income potential of an investment property is by calculating the gross rent multiplier. This formula can help determine which properties could be a good investment down the line based on the amount of rent they generate annually.
What is the Gross Rent Multiplier?
The gross rent multiplier is the formula investors use to determine the value and income opportunity associated with a rental property. The GRM is a function of how long the property will take to be paid off based on the anticipated rental income it will bring in.
It’s important to understand that the GRM doesn’t take into account the operating expenses on the property, like maintenance, taxes, insurance, and upkeep. Because GRM doesn’t consider additional expenses, the final number cannot be used as an accurate prediction of how long it will take to pay off but is more of a high-level indicator of the home’s potential earning value. It provides a starting point to investors as they make their decisions and can help compare two properties being considered.
Additionally, lenders will view the income potential compared to the cost of the property as a factor in approving a loan for an investment property.
How to calculate Gross Rent Multiplier on a property
GRM is a ratio of the rental income the property brings in on an annual basis and the home's fair market value. To calculate it, you use the formula:
Gross Rent Multiplier = Fair Market Value ➗Gross Rental Income
For example, if an investor is looking to purchase a rental property priced at $400,000, and annually it brings in $50,000 in rent, the property’s GRM is 8 years. On the other hand, if a more expensive property brings in more rent proportionally, it could have a lower GRM. Such as a $500,000 home that brings in $75,000 in rent annually. The GRM for this property would be 6.5 years.
You can also use this formula to calculate what a fair market value of a property would be. If you have the GRM of a property and know how much rental income it brings in you can use the following formula to calculate an estimated price of the home:
Gross Rent Multiplier x Annual Rental Income = Fair Market Value
Or, you can use GRM to figure out how much rental income the property brings in. If you know the area’s average GRM, you can use the following formula to calculate annual rental income:
Fair Market Value ➗ Gross Rent Multiplier = Annual Rental Income
These are all helpful formulas as you determine if a property is a good rental investment or not.
What is a good GRM?
As investors are evaluating a property, it’s important to consider the length of time it will take before they can start making a profit on the property. The less time it takes, the lower the GRM will be.
Generally speaking, investors look for a GRM between four and seven years. Depending on the type of market or income potential, a GRM over seven years could still be a good investment — it just depends on how long the investor is willing to take to pay the property off.
What is the difference between GRM and Cap Rate?
GRM and Cap Rate can sometimes be confused with each other. While they are both used in comparing investment properties, they measure different things.
Cap rate, also known as capitalization rate, is calculated by taking its net operating income and dividing it by the property’s current value. It helps determine the potential return on investment — not the length of time to pay off a property.
Another big difference is that cap rate will take into effect costs to operate the property, like taxes, insurance, and occupancy rate, providing a more in-depth look at potential profit.
While the cap rate of a property can more accurately reflect costs, it also requires more information to calculate, making it less popular for investors looking to determine an investment property's earning potential quickly. That’s where GRM can be an easily accessible metric.
What is the best way to find investment properties?
Finding the right investment property can be difficult. The market is competitive, and inventory for good rental properties can be few and far between. As an agent, you can help your clients find the right property with a bit of hard work and consistency.
Drive through neighborhoods
One way to find off-market investment properties is through on-the-ground grassroots efforts. To do this, drive through neighborhoods, and look for abandoned or neglected properties. You can contact the title company to find out who the owner is and if they’re interested in selling.
Property management companies
Another place to find investment properties is through property management companies that are looking to sell part of the management inventory. These properties are likely already occupied and could be an easy way to start collecting money.
Lastly, individuals listing their home through For Sale By Owner could be a promising avenue for investment property leads. Often these individuals will be looking to save money on commission or marketing expenses, and you can present them with a convenient solution.
With so many investors taking advantage of the hot real estate market, there is a lot of competition to find the most profitable properties.
Make sure you consider the property's condition, location, and rentability before purchasing. Your real estate agent can provide helpful insight and expertise on what will be a good investment!
Final thoughts on gross rent multiplier
As you search for an investment property, using the gross rent multiplier formula can help you determine when you might be able to pay off the property and earn 100% profit from rents.
This is helpful for investors comparing which property might be a better investment in the long run. By calculating GRM, you can
TL;DR: Gross rent multiplier is how real estate investor figure out what is a good property to invest in. By using the gross rent multiplier, investors can determine how many years is needed to pay off their rental property.