Definition of Gross Rent Multiplier
Gross rent multiplier is a calculation to determine whether or not a property is a good investment. The Gross Rent Multiplier compares the annual rental income of a property, before any expenses or deductions, with the cost of the investment (the fair market value or purchase price of the investment).
Why is this term important?
Using the gross rent multiplier formula is a first assessment tool to determine value before deciding whether or not to do further research in appraising the property as an investment. This form of valuation is only used when determining whether or not purchasing a home is a good deal.
The calculation used to determine the gross rent multiplier is the market value of the home divided by the gross rental income. A GRM of 3 suggests that the gross rent will pay for the property in 3 years, while a GRM of 12 suggests that it will take 12 years to pay off the cost of buying the property using the gross rent.
As a buyer, you are looking for a low gross rent multiplier. Gross rent multipliers under nine are good, whereas gross rent multipliers above 12 are not as lucrative of opportunities.
Examples of term
If a property has a market value of $700,000 and the annual gross rental income is $80,000 (which is nearly $7,000 per month), it’s gross rent multiplier (GRM) would be 8.75 and considered a good investment opportunity.
Example: $700,000 / $80,000 = 8.75 GRM