Ever heard of the gross rent multiplier? If not, it’s time you do. Every real estate investor should understand what it is and what it represents when buying an investment property.
What Is Gross Rent Multiplier?
It’s actually one of the easiest metrics to calculate in real estate investing; that’s probably why it’s always covered in real estate investing for beginners. The gross rent multiplier is a ratio of property value to income- real estate basics in valuation analysis.
This figure is mainly used to evaluate multi-unit and commercial income producing real estate investments. So dividing the property’s cost by the annual gross revenue collected from rent will give you a ratio that can be used to compare and contrast similar investments in a similar market.
Yes, the gross rent multiplier is quite simple when you compare it to other metrics because it doesn’t account for a lot of things. However, it’s a great tool to use when scanning multiple rental properties; it allows investors to quickly and easily decide whether a prospective real estate investment is worth looking into or doesn’t deserve the extra effort.
Related: Cap Rate vs. Gross Rent Multiplier: Advantages and Disadvantages
How to Calculate Gross Rent Multiplier
So just how easy is it to actually calculate? According to the gross rent multiplier formula, it’ll take you less than five minutes.
Gross Rent Multiplier = Property Price / Gross Rental Income
Like we said, very straightforward and simple. There are only two variables included in the gross rent multiplier calculation. And they’re fairly easy to find. If you haven’t been able to determine the property price, you can use real estate comps to ballpark your building’s potential price. Gross rental income only looks at a property’s potential rent roll (expenses and vacancies are not included) and is an annual figure, not monthly.
Related: Real Estate Investing 101: How to Calculate Rental Income
The GRM is also known as the gross rate multiplier or gross income multiplier. These titles are used when analyzing income properties with multiple sources of revenue. So for example, in addition to rent, the property also generates income from an onsite coin laundry.
The result of the GRM calculation gives you a multiple. The final figure represents how many times larger the cost of the property is than the gross rent it will collect in a year.
How Investors Should Use GRM
There are two applications for gross rent multiplier- a screening tool and a valuation tool.
The first way to use it is in accordance with the original formula; if you know the property price and the rental rate, GRM can be a first quick value assessment tool. Because investors usually have multiple property listings on their radar, they need a quick way to determine which properties to focus on. If the GRM is too high or too low compared to recent comparable sold properties, this can indicate a problem with the property or gross over-pricing.
Another way to use gross rent multiplier is to actually determine the property’s price (market value). In this case, the value calculation would be:
Property Value= GRM x Gross Rental Income.
If you know your area or local market’s average GRM, you can use it in a property’s valuation. Here’s the gross rent multiplier by city for apartment rentals.
So the gross rent multiplier can be used as a filtering process to help you prioritize potential investments. Investors can also use it to estimate a ballpark property price. However, due to the simplicity of the GRM formula, it should not be used as a stand-alone tool. Actually, no one metric is capable of determining the value and profitability of a real estate investment. The real estate investing business just isn’t that simple. You need to use a collection of different metrics and measures to accurately determine a property’s return on investment. That’s how you get a precise analysis to make the right investment decisions.
Related: Return on Investment: A Beginner’s Guide to Investing in Rental Properties
What Is a Good Gross Rent Multiplier?
Take a second to think about the actual gross rent multiplier formula. You’re comparing the cost of the property to the revenue it’ll generate. Rationally, you would want to aim for a higher income with a lower cost. So the ideal GRM would be a low number. Typically, a good GRM is somewhere between 4 and 7. The lower the GRM, the better the value- usually.
You need to keep in mind the property’s condition. Is it in need of any renovations? Or are the operating expenses too much to handle? Maybe a cheap property that rents well won’t perform as well in the long-term. That’s why it’s crucial to properly analyze any property before buying it.
Related: What Are the Most Important Metrics in Real Estate Investment Property Analysis?
It’s also not a universal figure; meaning real estate is a local industry and GRM is dynamic because rental income and property values are dynamic. So how can you quickly and easily find the appropriate figures for your investment property analysis?
Using Mashvisor’s Data
Mashvisor’s investment property calculator provides all the important data involved in a property analysis. And the best part is, real estate investors can use it to find data on any neighborhood in any city of their choosing. Our tools will give you property listings in whatever market you choose, along with their expected rental income, expenses, cash flow, cap rates, and more. So if you were having a difficult time finding the appropriate data in your area required to calculate gross rent multiplier, just use Mashvisor’s tools. You’ll find median property prices and average rental income for both traditional rentals and Airbnb rentals.
How can you use these tools? By signing up for free! To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
