Gross Rent Multiplier - GRM

 

              The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value 

              of income producing properties.  It provides a rough estimate of value.    Only

              two pieces of financial information are required to calculate the Gross Rent

              Multiplier for a property, the sales price and the total gross rents possible.  If this 

              information is available for multiple sales of similar types of income properties in a

              particular area, it can then be used to estimate the market value of other similar

              properties in that area.  Some investors use a monthly Gross Rent Multiplier and

              and some use a Yearly GRM.  The monthly GRM is equal to the Sales Price of a

              property divided by the potential monthly gross income and the Yearly GRM is the    

              Sales Price divided by the yearly potential gross income.    

 

              Example 1:  If the sales price for a property is $200,000 and the monthly potential 

              gross rental income for a property is $2,500, the GRM is equal to 80.  Monthly 

              potential gross income is equal to the full occupancy monthly rental amount which

              assumes all available rental units are occupied.  Generally speaking, properties in  

              prime locations have higher GRM's than properties in less desirable locations.

              When comparing similar properties in the same area or location, the lower the GRM,  

              the more profitable the property from an income perspective.  This statement     

              assumes that operating expenses are proportionate for the properties being  

              compared.  Since the GRM calculation doesn't include operating expenses, this  

              statement might not hold true for similar properties where one of the properties

              has significantly higher operating expenses.

 

                                                                    Sales Price                                $200,000

                  GRM (monthly)  =   -------------------------------------------     =     ------------    =    80

                                                    Monthly Potential Gross Income              $2,500

 

              Example 2:  We have several similar properties that have sold recently and their

              average monthly GRM is 80.  We can use this information to estimate the value

              of comparable properties for sale.  If our monthly potential gross income for a  

              property is equal to $3,000, we would estimate its value in the following way. 

 

                    Estimated Market Value  =  GRM    X    Potential Gross Income 

 

                                                         =      80      X         $3,000      =      $240,000   

                                                    

             A market GRM can provide a rough estimate of value when consistent and

             accurate financial information is available for sales of similar types of properties

             in a particular market place, but it does have some limitations.  Operating expenses,

             debt service and tax consequences are not included in the GRM calculation.  We

             could have a situation where two properties have approximately the same potential

             gross income, but one property has significantly higher operating expenses.  The

             above formula would result in a questionable estimation of the market value for

             these properties.  Also, the above GRM formula uses the monthly potential gross

             income and doesn't account for a vacancy factor which could have an impact on

             the accuracy of the property value estimates.  This is why it is important to have

             accurate and detailed financial information for comparable sales when establishing

             a GRM or Cap Rate for income producing properties.

 

             The GRM is sometimes calculated using the effective gross income rather

             then the potential gross income thus incorporating the vacancy factor in the    

             GRM calculation.  Effective Gross income equals potential gross income

             minus the vacancy amount. When vacancy rates are a factor, using the 

             effective gross income will produce a more reliable estimate.

 

             The capitalization rate is a more reliable tool for estimating the value of 

             income producing properties since vacancy amount and operating   

             expenses are included in the cap rate calculation.   The GRM is useful   

             in providing a rough estimate of value.

     

            The our real estate investment analysis calculates many different real estate

            investment ratios including a monthly and yearly GRM ( gross rent multiplier).  We

            will calculate a Gross Income Multiplier (GIM) as you enter a properties financial

            data.  No need to use a calculator.  Let our Team do the work.  We will automatically

            recalculate the GIM when you make changes to the sales price, rental income and other

            income.  We will provide a powerful  investment analysis tool and it should be a part

            of your arsenal. 

 Tien and Jim 

Your Real Estate Partners