Why All Investors Should Understand the Gross Rent Multiplier

Why All Investors Should Understand the Gross Rent Multiplier

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Brett Lee Read More

The gross rent multiplier (GRM) is a ratio of property value to income for buy and hold investments. That’s it. It’s the simplest equation in investing. While there is a lot the GRM doesn’t take into account, it does allow you to quickly and easily decide if you should spend more time looking into the property or pass it up.

If you analyze every property that comes up, you’ll burn out and miss opportunities that require quick action. One of the most important thing you can do in investing is learn a few time-saving shortcuts like GRM and cap rates to weed out bad deals. The more efficient you are, the better you’ll be at investing.

“The difference between successful people and really successful people is that really successful people say no to almost everything.” — Warren Buffett

That’s the purpose of the GRM. Saying no.

Related: Gross Rent Multiplier – Techniques to Speed Up Your Decision Making, Part II

The Equation

GRM = Value of Property/Annual Gross Income

Alternatively, you can estimate the value of a property using the same equation.

Value of Property = GRM x Annual Gross Income

The GRM for any area, type of property or point in time is dynamic because income and property values are dynamic. There are no hard and fast rules with GRM, and the only way to know what to expect is to gather local data and calculate it. While understanding GRM will save you a lot of time and effort down the road, I guarantee you few people will go through the effort to figuring it out. That’s where you can shine.

“Thinking is the hardest work there is, which is why so few people do it.” — Henry Ford

How Do You Determine GRM For Your Area?

Find the average annual rents for specific properties you want to invest in. Don’t use the rents you think are possible or even the rents you want. Average rents are best for this calculation.

Find the sales prices for those properties. You can do this online using local tax records. If you don’t know where to find the records, call a real estate agent. They will be able to access all of that information for you.

If the above data came from recent sales on properties you want to invest in, then you can expect a GRM in the high 13s. Is that good?

No. The lower the GRM, the better the value. A GRM in the high 13s, using the current interest rate of ~4% and 100% financing, would mean breaking even on the mortgage. When you include vacancies and repairs, you are going to lose money over the year. In general I would suggest trying for a GRM of less than 10 to cover all of your costs and come out ahead.

Related: 3 Important Factors When Considering A Market for Real Estate Investment

Notes on Using GRMs

When I see a GRM that is better than average, the first thing I do is look for something wrong. When someone sells a property, you can bet they want the best price. I’ve never met a seller who didn’t. It’s not in our nature to lose money. So, keep you eyes out for deferred maintenance, un-permitted work and hidden defects when the GRM seems too good.

The GRM is an oversimplified equation that can save you a lot of time and effort. 

Investors: Do you use GRM calculations to roughly evaluate your properties?

Let me know with a comment!

The gross rent multiplier (GRM) is a ratio of property value to income for buy and hold investments. That’s it. It’s the simplest equation in investing. While there is a […]