Real estate can be a mystery if you’re new to it. You’re always evaluating properties, crunching numbers and trying to figure out if an investment is worth your time and money. One of the simplest tools you can use to get a quick read on a property is the Gross Rent Multiplier (GRM). Not the only metric you should use but a great place to start to compare properties and decide where to dig deeper. This guide will walk you through what GRM is, how to calculate it and how to use it in your real estate journey.
What is the Gross Rent Multiplier (GRM)?
Let’s get to the basics: what is the Gross Rent Multiplier (GRM)? Simply put, GRM is a ratio of a property’s price to its gross rental income. A quick and easy way to get a snapshot of a property’s earning potential vs its cost. The formula is simple:
GRM = Property Price / Gross Annual Rent
Think of GRM as a filter. When you’re looking at multiple properties, GRM helps you filter out the ones that aren’t worth your time. A lower GRM means a better deal because you’re paying less per dollar of rent the property generates.
How to Calculate the Gross Rent Multiplier (GRM)
The beauty of GRM is its simplicity. All you need are two numbers: the property’s purchase price and its gross annual rental income.
Let’s use an example:
Suppose you’re looking at a property that’s priced at $500,000 and it generates $72,000 in gross rental income per year. Plug in the numbers:
GRM = $500,000 / $72,000 = 6.94
But what does this number mean? On its own a GRM of 6.94 is neither good nor bad. The key is context. You need to compare it to the GRMs of similar properties in the same market. If other properties in the area have a GRM of 8 or 9 then 6.94 is a good deal. But if most comparable properties have a GRM of 5 then 6.94 might not be as good of a deal.
GRM Results
GRM is just a number but it can tell you a lot if you know how to read it. Here’s the general rule of thumb: a lower GRM is better. Why? Because it means the property is generating more income relative to its price so you can pay off your investment faster.
Property Class and GRM
Also worth noting that GRM can vary by property class. Class A properties (prime locations with high end finishes) have lower GRMs because they command higher rents relative to price. Class C properties (those that need work or are in less desirable areas) have higher GRMs. Not necessarily a bad thing but something to consider when comparing properties.
Location and Market Conditions
GRM can also vary greatly by market and location. A property in a hot market might have a higher GRM because prices are higher, a property in a slow market might have a lower GRM. Understanding the local market conditions is key to interpreting GRM.
What is a Good GRM?
So what’s a good GRM? A good GRM is between 4-7 but this can vary greatly by market, property type and your investment goals. A GRM on the lower end of that range means faster return on investment, a higher GRM means it will take longer to get your money back.
GRM to Your Strategy
The “best” GRM is really dependent on your strategy as an investor. If you’re looking for a quick flip or a property that can cash flow immediately then a lower GRM is ideal. But if you’re looking for long term appreciation or investing in a high demand market where higher GRMs are common then you might be willing to accept a higher GRM.
Maximize Gross Rent
One of the best things about GRM is it’s not set in stone. You can improve a property’s GRM by increasing its gross rental income or decreasing its purchase price.
Increase Rental Income
Increasing rental income can be done in many ways. You can raise the rent if the market allows it. Another option is to add additional units, convert unused space into rentable areas or add amenities that justify higher rent. Even small improvements like new appliances or upgraded common areas can make a difference in what tenants are willing to pay.
Negotiate the Purchase Price
On the other side of the equation, lowering the purchase price directly impacts the GRM. If you can negotiate a better deal with the seller or wait until the market cools you can improve your GRM and by extension your overall return on investment.
GRM vs Cap Rate: What’s the Difference?
Now you might be wondering how the Gross Rent Multiplier stacks up against another popular metric: the capitalization rate, or cap rate. While both GRM and cap rate are used to analyze investment properties, they do it in different ways.
What is the Cap Rate
The cap rate is a ratio of a property’s net operating income (NOI) to its current market value. Unlike GRM which only looks at gross rental income, the cap rate takes into account operating expenses like property taxes, maintenance costs and insurance. This makes the cap rate a more accurate measure of a property’s profitability.
Cap Rate = Net Operating Income / Property Value
While the cap rate gives you a more accurate picture of a property’s income potential, it’s also more complicated to calculate. GRM is quick and easy to use so it’s a good starting point when you’re screening multiple properties.
GRM vs Cap Rate
Think of GRM as the 30,000 foot view and cap rate as the 10,000 foot view. GRM is good for comparing properties and narrowing down your options, cap rate is better for a deep dive once you’ve found a few good candidates. Both have their place in your tool belt and using them together will help you make better investment decisions.
GRM in Real Life
Let’s talk about how you might use GRM in real life. As a real estate investor time is money and you don’t want to waste either on properties that don’t have potential. GRM allows you to quickly determine if a property is worth further investigation.
Quick Property Comparisons
Say you’re looking at 5 different properties in the same neighborhood. Instead of digging into the financials of each one you can calculate the GRM for each property first. If 2 of them have GRMs way higher than the others you can set those aside and focus on the properties with the better numbers.
Save Time and Resources
By using GRM as a first filter you save time and resources that would otherwise be spent on digging into properties that don’t meet your investment criteria. This way you can focus on the properties with the highest return.
Commercial Real Estate
GRM is especially useful in commercial real estate where properties have additional overhead and maintenance costs. GRM doesn’t account for these expenses but it does give you a quick way to determine if a property is worth further investigation.
Summary
The Gross Rent Multiplier (GRM) is a simple and powerful tool for real estate investors. It’s easy to calculate and allows you to screen properties and compare them side by side. But remember GRM is just one piece of the puzzle.
Before you make any investment decisions you should also consider the cap rate, cash on cash return and the overall condition of the property. Using GRM along with these other metrics will give you a more complete picture and help you make better investment decisions.
So do your homework. The more tools and knowledge you have the better your chances of finding and buying good properties. Now you have the GRM in your tool belt use it well.