There’s a lot to consider when you’re looking to buy an investment property. You want to find the best neighborhood, with good schools and low vacancy rates, to ensure the property is in high demand. And, of course, you’ll want to buy a great deal under market value to ensure it’s an income-generating property.

Investors have different investment methodologies to consider and calculations to assess a property’s potential value. Remember the gross rent multiplier! This metric can be invaluable in screening different rental property opportunities quickly and efficiently. This article will teach you everything you need to know about gross rent multiplier and how this formula can help you make smarter investment decisions.

What is the gross rent multiplier?

The gross rent multiplier, or GRM for short, is a simple equation that divides the property market value by the yearly gross monthly rental income. Commercial real estate investors often use it as a down-and-dirty way to sort properties. This number can give you a quick way to compare different properties and determine the better investment.

The gross rent multiplier formula looks like this:

Fair Market Value (or Purchase Price) / Gross Annual Rental Income = GRM

The property’s price can be used if the listing is near its fair market value, which can be determined by reading the description and looking at comparable properties.

Gross annual rent is the total rental income for 12 months, not considering any vaccines or operating expenses.

Let’s put some numbers behind the calculations. Property A has a sale price of $200,000 and rents for $1,500 per month. Property B is selling for $250,000 and rents for $2,000 per month.

We divide the fair market value by the rental income to calculate the gross rent multiplier.

Property A would be 200,000/(1,500 x 12) = 11.1.

For Property B, it would be 250,000/(2,000 x 12) = 10.4

In this example, you can see that even though Property B has a higher monthly rent, it has a lower GRM. That means that Property A considered the better investment based on its GRM score because you’re getting more rental income for your money.

Why is the gross rent multiplier important?

The gross rent multiplier can be a helpful metric for a few reasons. First, it’s a quick and easy way to compare potential investment properties, especially if you’re working in various real estate markets nationwide. Suppose you’re looking at two properties, and one has a higher gross rent multiplier. In that case, that’s usually a good sign that it’s a better investment.

The gross can also give you an idea of what kind of return on investment you can expect from a property. In general, the lower the gross rent multiplier, the higher the return on investment. That’s because you’re getting more rental income for your money.

Of course, the gross rent multiplier is just one metric to consider when looking at investment properties. Consider all the different factors before deciding, like the property price, budget, and investment goals. However, the gross rent multiplier is one metric that can help screen different properties and narrow your options.

What doesn’t go into the GRM calculation?

Some believe that GRM is equivalent to an investment’s time to pay off. This isn’t true because GRM doesn’t calculate the Net Operating Income (NOI). Other expenses, like vacancies, marketing, capital expenses, and property taxes, impact the time to pay off.

The GRM calculation also misses accounting for long-term appreciation or property valuation changes. And if you buy a property under the asking price, it can change the GRM.

However, the gross rental multiplier can be a fast calculation when choosing between comparable properties for deeper investigation without regard to these extra costs. Consider it a starting point. Use other methods to measure a rental investment’s profitability.

What is an ideal GRM?

The average GRM will vary between markets, as it is relative to the rental market in which the property resides. Generally, a "good" GRM falls between 4 and 7