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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.
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. |
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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. |
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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 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.
©
Copyright 2000 - 2014 Advantage Software LLC |
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