The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM 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 some use a Yearly GRM. The monthly Gross Rent Multiplier 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 GRMs 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. 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

Estimated Market Value = 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 market 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.

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