GRM: Gross Rent Multiplier

I've noticed several forum posts asking about Gross Rent Multiplier (GRM).

This is a very simple tool for evaluating an income producing property.  It is a comparison of the purchase price and the gross monthly rent, before subtracting any expenses.

Some people do the calculation on a monthly basis, others do it on an annual basis. This is a personal choice. Either works.

For the monthly people, they might say to themselves, "I will buy any property for which the purchase price is equal to, or less than, 100X the monthly rent."  In other words, if the monthly rent is $800, that investor will spend up to $80,000 to acquire (and rehab, if necessary) the property. The annual people might say, "I will buy any property for which the purchase price is equal to, or less than, 8X the annual rent." In other words, if the monthly rent is $800, and annual rent is $9,600, then that investor will spend up to $76,800.

Remember to include rehab expenses in your calculations. You want to analyze the complete acquisition cost, not just the purchase price.

There is no magic number for a correct GRM.  Ask experienced investors in your marketplace about their numbers, talk to some bankers, or make your own comparison of known sales to known rental rates.

There are two benefits to the GRM:

• It is easy to use
• It is easy to explain to a seller. You say, "I understand that you want a higher price for your property, but my personal rule of thumb is a GRM of 100X the monthly rent.  It's just my rule. The only way the rule works is if I ALWAYS follow it. We can either do a deal on that basis, or I'll look at something else."

There are two drawbacks to the GRM:

• It does not take into account differing expenses for differing properties. Suppose House One has wood siding, a 15-year old roof, wall to wall carpeting and a swimming pool.  House Two is brick, has a two-year old roof, hard surface flooring, and no swimming pool. Taxes and insurance on House One are 20% more than House Two. They both rent for $800/month, and each can be purchased for $80,000. Are those two investments REALLY equal?
• Because it is a fairly unsophisticated tool, you might miss some great opportunities that don't hit your GRM mark.

My advice--start out with a GRM model for investment decisions, but also include certain parameters, such as age of roof, durability of interior surfaces, taxes and insurance as a percentage of value, and similar items. Then, you can compare apples to apples when making a buying decision.

The next, more sophisticated, analysis tool is called the capitalization of income approach. I'll cover that in my next post.