The gross rent multiplier (GRM) calculation has become synonymous with some of today’s easiest and fastest deal evaluation strategies. Assessing the GRM in real estate deals, prior to making an acquisition, can give investors a better idea of the timetable they may expect to make their money back on a rental property.
Subsequently, investors may be able to use the resulting variable to help them pick the impending deal that works best for their particular situation. Nonetheless, there are certainly a few things to learn about the gross rent multiplier before anyone should apply it to their own investment strategy. Below you’ll find a quick breakdown of what the gross rent multiplier is, what it’s used for, and how to use it.
The gross rent multiplier (GRM) in real estate is a simple, yet useful, calculation that should help investors analyze a rental property’s potential. More specifically, the gross rent multiplier awards passive income investors the ability to identify the ratio of the price of a rental property to the amount of income they expect the asset to bring in over the course of a year—before expenses are accounted for.
In its simplest form, however, the gross rent multiplier reveals the number of years a rental property owner can expect to wait until the property pays for itself with the rent it generates. As a result, the lower the gross rent multiplier is, the faster investors should expect to get their money back. While far from perfect, the gross rent multiplier serves a useful purpose: to act as a quick valuation tool; one that could even help investors choose between multiple investment opportunities.
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Despite brandishing a name that many new investors may be intimidated by, the gross rent multiplier is surprisingly easy to calculate. In fact, only two variables are needed to be ale to calculate the gross rent multiplier: the market value of the subject property and the amount of money it is expected to generate in rent over the course of a year. Once you are confident you have the correct data, simply divide the market value of the home but the annual gross income. It should look something like this:
Market Value / Annual Gross Income = Gross Rent Multiplier
A good GRM is relative, which begs the question: What is a good gross rent multiplier? The lower the GRM, the better, but it’s not safe to assume a rental property will pay for itself in the first year. Consequently, investors don’t want to wait too long for the rental property to start producing returns. As a result, most investors will want to find a nice middle ground. Typically, a good GRM to shoot for is somewhere in the neighborhood of four to seven years.
The gross rent multiplier is far from perfect, and even fails to account for several costs, but it has developed a reputation for serving investors as an invaluable tool. If for nothing else, this particular calculation is the quickest and easiest way to assess how long a rental property will take to pay for itself. That said, GRM in real estate also serves another important purpose: by placing an objective timetable on a particular asset, the gross rent multiplier may help investors choose the deal that suits their needs the best. More often than not, the best deal is the one that fits the plan you already have in place.