Gross Rent Multiplier for Real Estate

If you’re considering the purchase of rental property, then the Gross Rent Multiplier is a tool that can help you decide what that property is worth. The GRM is not an exact formula. Rather, it is used to give investors a general idea of what kind of offer to make on that property.

Gross Rent Multiplier

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How to Use the Gross Rent Multiplier

You’ll need some important information before you can come up with the sum of the GRM. Here are a few things you need to know to make this formula work for you.

  • The sale price of the property
  • The annual gross income
  • GRMs of comparable properties

Divide the sale price by the annual gross income. A $400,000 property that has an annual gross income of $110,000 would look like this: 400,000/110,000 = 3.63. Comparable properties should have a similar result. If this is the case, then it’s worth exploring the property to purchase more.

Hidden Factors

Although the GRM gives you a metric to compare your potential property with others, it does not factor in some very real considerations.

  • Does the landlord pay the utilities?
  • Are there many vacancies?
  • Are there repairs?
  • Are property taxes similar on comparable properties?

Only use the GRM as a loose tool that indicates whether it’s worth exploring the investment property more. The net income on the investment is a much more important factor to consider. The GRM factors in gross income.

Before you get serious about buying rental properties, make sure you are financially ready to use part of the gross income towards the upkeep on your new property. You should also be prepared for unpaid rent and sudden vacancies. Renters are different from owners. They don’t have a committment to the bank. If you’re able to handle the unknowns, then rental properties are a great source of income.