Advantage Software LLC  What is the Gross Rent Multiplier and How is it Calculated?
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     Gross Rent Multiplier - GRM
 
 
  The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties.  It 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 recent 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.  The monthly gross rent multiplier is equal to the Sales Price of a property divided by the potential monthly rental income and the Yearly GRM is the Sales Price divided by the yearly potential rental income.  
     
 
     
 

Example 1:  If the sales price for a property is $200,000 and the monthly potential rental income for a property is $2,500, the GRM is equal to 80. Monthly potential rental 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 gross rent multiplier, the more profitable the property.  This statement assumes that operating expenses are proportionate for the properties being compared.  Since the gross rent multiplier 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 in the same area 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 
 
                                                            =     80    X     $3,000    =    $240,000   
                                                    
  A market GRM can provide a rough estimate of value, but it does have some limitations.  The  calculation doesn't include a property's operating expenses and vacancy factor.  We could have a situation where two properties have approximately the same potential rental 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 formula uses the monthly potential rental income and doesn't account for a vacancy factor which could have an impact on the accuracy of the property value estimates.  The seasoned investor understands the above limitations and uses the gross rent multiplier to get a quick feel for the potential market value of an income property.

The gross rent multiplier is sometimes calculated using the effective gross income rather then the potential rental income thus incorporating the vacancy factor in the calculation.  Effective Gross income equals potential rental 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. 

The On Target real estate investment software calculates many different real estate investment ratios including a monthly and yearly gross rent multiplier.  On Target calculates a Gross Income Multiplier (GIM) as you enter a property's financial data.  No need to use a calculator.  Let On Target do the work.  On Target automatically recalculates the GIM when you make changes to the sales price, rental income and other income.  On Target is a  powerful  investment analysis tool and it should be a part of your arsenal.   On Target is just $99.95 and it includes many different features that can assist with your real estate investment decisions.  To order, click on   Purchase Software   To find out more, click on    Software Features   The On Target real estate software includes a 30 day money back guarantee and free support.

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