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Gross Rent Multiplier
- GRM |
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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 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 GRM. 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 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. |
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Sales Price $200,000 |
| GRM (monthly) = -------------------------------------------- = --------------- = 80 |
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Monthly Potential Gross Income $2,500 |
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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. |
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| Estimated Market Value = GRM X Potential Gross Income |
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= 80 X $3,000 = $240,000 |
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A market GRM can provide a rough estimate of value, but it does have
some limitations. The GRM 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 GRM 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 GRM is sometimes calculated using the effective gross income
rather then the potential rental income thus incorporating the vacancy factor
in the GRM
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 GRM ( 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 $97.95
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.
©
Copyright 2000 - 2010 Advantage Software LLC |
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