What is Gross Rent Multiplier (GRM)?
Gross Rent Multiplier
GRM
A property’s gross rent multiplier or “GRM” is a metric utilized to quickly calculate its profitability compared to similar properties in the same real estate market. To determine the gross rent multiplier, you would take the price of the property, and divide it by the gross rental income. So, for example, if a property is selling for $2,000,000 and it produces a Gross Rental Income of $320,000, the GRM would be $2,000,000 divided by $320,000 which equals 6.25. Now, that result means next to nothing on its own, but when compared to similar properties in the same market, it provides actionable data for lenders to consider.
GRM Calculator
The Gross Rent Multiplier Formula
The formula to calculate GRM is:
Gross Rent Multiplier = Property Price / Gross Rental Income
Using Gross Rent Multiplier
GRM can be used to estimate the value of an income-producing property when its value is not known. For example, if we know that a property produces about $100,000 of income per year, and the average GRM of similar properties in the area is about 6, we could multiply the two ($100,000 x 6) to create an estimated property value of $600,000. While this is not meant to be utilized as an exact calculation, it can provide a workable estimate for a property investor to use when comparing a variety of properties.
Additionally, if you know what the value of a property is, and you know the average GRM for properties in the area, you can use the Gross Rent Multiplier formula to calculate the expected rent for the property. So, for instance, if a property is valued at $850,000, and the average GRM in the area is 8, you could divide the property value by the average area GRM to determine expected rental income.
When assessing a property for its eligibility for an apartment loan, lenders will look at its GRM in comparison to similar local properties in order to determine the chance that a borrower will be able to effectively pay back their loan. Another common variant of GRM exists, that is the Gross Income Multiplier (GIM), which also incorporates any non-rental sources of income, such as vending machines or coin-laundry machines.
What Is a Good Gross Rent Multiplier?
The general rule of thumb is that the lower the GRM of a property at purchasing price- the better the investment in an income producing property. Even so, gross rent multiplier simply does not truly reflect enough viable information for an investor to properly and accurately gauge a property's returns.
In this sense, a lower GRM tends to be beneficial to a would-be investor, but beyond that, it is difficult to nail down a specific value fitting of a "good" GRM. In many cases geography plays a large roll in the GRMs of a given market. Some of the better cities for real estate investing might have GRMs under 8. In areas of lesser investing interest, it wouldn't be uncommon to see a GRM over 20.
It is important to note that even having said that, an investor should expect to come across a wide range of GRMs in any given market. Dispelling the confidence of the previous paragraph, there are in existence less desirable cities with extremely low GRMs, and high end cities with GRMs easily into the 30s. Because of this, one should always take the GRM metric as more of an educated estimate than a hardline truth.
Gross Rent Multiplier in relation to Cap Rate
Gross Rent Multiplier is often juxtaposed with a similar property valuation metric known as capitalization rate, or "cap rate" for short. The cap rate of a property is calculated by taking its net operating income (NOI) and dividing it by the property’s current market value. Cap rate differs from GRM in the regard that the cap rate incorporates vacancies and operating expenses, which makes it potentially far more accurate than the gross rent multiplier metric. However, when attempting to quickly estimate and compare the profitability of multiple properties, investors may not have access to detailed occupancy or expense information for each property, which can make GRM a more efficient method to quickly evaluate investment properties.
Related Questions
What is the formula for calculating Gross Rent Multiplier (GRM)?
The formula to calculate GRM is:
Gross Rent Multiplier = Property Price / Gross Rental Income
So, for example, if a property is selling for $2,000,000 and it produces a Gross Rental Income of $320,000, the GRM would be:
$2,000,000/$320,000 = 6.25
Source: www.multifamily.loans/gross-rent-multiplier, apartment.loans/posts/what-is-gross-rent-multiplier-grm, apartment.loans/gross-rent-multiplier-calculator
What factors affect Gross Rent Multiplier (GRM)?
The Gross Rent Multiplier (GRM) is affected by several factors, including the location of the property, the condition of the property, the rental rates in the area, and the demand for rental units in the area. Additionally, the GRM can be affected by the availability of financing, the terms of the loan, and the current market conditions. Source 1, Source 2.
How is Gross Rent Multiplier (GRM) used in commercial real estate financing?
Gross Rent Multiplier (GRM) is used in commercial real estate financing to quickly calculate a property’s profitability compared to similar properties in the same real estate market. GRM is calculated by dividing the price of the property by its gross rental income. For example, if a property is selling for $5,000,000 and it produces a Gross Rental Income of $820,000, the GRM would be $5,000,000 divided by $820,000 which results in a value of 6.09. This metric is then compared to similar properties in the same market, and it provides actionable data for investors and lenders to consider when making financing decisions.
For example, lenders may use GRM to determine the loan-to-value ratio (LTV) of a property. A higher GRM may indicate a higher LTV, which could result in a higher loan amount. Additionally, lenders may use GRM to determine the debt service coverage ratio (DSCR) of a property. A higher GRM may indicate a lower DSCR, which could result in a lower loan amount.
Ultimately, GRM is a useful metric for lenders to consider when evaluating a commercial real estate loan. It provides a quick and easy way to compare a property’s profitability to similar properties in the same market, and it can be used to determine the LTV and DSCR of a property.
What are the advantages and disadvantages of using Gross Rent Multiplier (GRM) for commercial real estate financing?
The advantages of using Gross Rent Multiplier (GRM) for commercial real estate financing are that it is a quick and easy way to calculate the profitability of a property compared to similar properties in the same real estate market. It also takes into account gross rents, which can be useful for investors.
The disadvantages of using GRM for commercial real estate financing are that it does not take into account taxes, insurance, and operational expenditures (OpEx), which may vary drastically from property to property. It is also important to look at other factors, such as internal rate of return (IRR), to get a more accurate picture of a property's potential suitability as an investment.
What are the best practices for using Gross Rent Multiplier (GRM) in commercial real estate financing?
The best practices for using Gross Rent Multiplier (GRM) in commercial real estate financing are to use it as a quick way to calculate the profitability of a property compared to similar properties in the same real estate market. The GRM should be between 6 and 10, and it is calculated by dividing the sale price of a property by its annual gross rental income. A higher GRM indicates that the property is overpriced, while a lower GRM indicates that the property is underpriced.
When it comes to financing a commercial or multifamily real estate project, lenders will typically look at the GRM to determine the value of the property. Lenders may also look at other factors such as the borrower's creditworthiness, the amount of equity in the property, and the loan-to-value ratio. Depending on the lender, they may also offer different loan products with different terms and conditions.