Gross rent multiplier: A guide for property investors

Gross Rent Multiplier is a metric calculated by dividing a property’s purchase price by its gross annual income. Many people will tell you that the GRM shows you how long it will take to pay off a rental property. This is not correct because the GRM doesn’t take into account ownership expenses like maintenance and repair or debt used to purchase. GRM is most helpful as a comparative metric.

Here’s how to calculate GRM: 

GRM = Property price / Gross annual income 

In the GRM formula:

• Property price: This is the purchase price of the property. 

• Gross annual income: This includes annual rental income as well as additional income the property generates (e.g. parking spaces, coin-op laundry, or extra storage). You can estimate annual rental income by doing a rental market analysis based on the location of the property. 

GRM examples

Let’s say that you’re looking at a property with a sale price of $200,000, which includes four units that you can rent out for $1400 apiece. This building doesn’t generate any extra income via parking spaces or other add ons that you will need to add to the gross annual rent.

First, calculate the gross annual income:

$1400 x 4 units x 12 months in a year = $67,200 gross annual income

Then, apply it to the formula for GRM:

200,000 / 67,200 = 2.9 GRM

Now let’s say you’re buying a building for $1.5 million with nine units that will rent for $950 apiece. You also estimate you’ll make an extra $1000 per month from parking space rentals. 

First, calculate the AGI:

($950 x 9 units x 12 months in a year) + ($1000 x 12 months in a year) = gross annual income

$102,600 + $12,000 =  = $114,600 gross annual income

Then, apply it to the formula for GRM:

1,500,000 / 114,600 = 5 GRM

As a rule of thumb, the lower the GRM, the better the potential return on investment (ROI), but that’s not a guarantee. The most practical way to evaluate a GRM is by comparing it to the average GRM in the same area. What constitutes a great GRM in one city or neighborhood may not in another.

It’s important to do your due diligence when evaluating real estate investments. Understanding the benefits and limitations of using GRM will help you be thorough in your decision making.

Benefits of using GRM

• The GRM formula allows you to very quickly evaluate multiple properties in a given market. 

Limitations of using GRM

• The GRM is a rough calculation that doesn’t factor in other costs like insurance, property taxes, and debt required to make the purchase.

• GRM also doesn’t factor in operating expenses, which include the cost of vacancies, property maintenance, and how much your property managers charge.

• GRM doesn’t adequately represent the opportunity in a fixer upper.

While GRM uses gross annual income in its equation, net operating income (NOI) is another helpful metric to calculate. NOI is the gross annual income generated by a property minus operating expenses, which includes maintenance, repairs, property management fees, and the like. Whereas GRM is a ratio, NOI is a dollar amount. 

NOI is an input in another formula called capitalization rate, which also evaluates the investment potential of property based on the rental income it’s projected to generate. 

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