What is a good Gross Rent Multiplier?

10 Replies

What GRM range should one stay in when buy multi families and mobile home parks?

Thanks

Jordan

It just means price / gross monthly rent sometimes appraisers use sales price / annual gross rents.

In most cases its sales price / gross monthly rent.

Example: 250,000 sales price / $2500 gross monthly rent = GRM of 100

It could mean that properties are trading at a GRM of 100 in this particular area so be sure to check out what the GRM is on nearby comparable properties.

GRM is only a comparison of gross rents and sales price not how efficient each property is "netting," in terms of income. The capitalization rate (cap rates) allows you to compare what properties "net," at the end of the day relative to the sales price the seller is asking for.

Originally posted by @Jordan Vires:

What GRM range should one stay in when buy multi families and mobile home parks?

Thanks

Jordan

Just like CAP rates, GRMs will vary quite a bit depending on the quality and location of properties. You can probably find plenty of properties between 50 and 200, but you have to decide what works best for you. The higher the GRM (lower CAP rate) the more likely you'll see appreciation and better quality tenants. The lower the GRM and higher CAP rate, the less likely you are to see appreciation and more likely you'll deal with higher vacancy/eviction/turnover costs. These are generalities, but should give you a good idea. I typically look for 75-150 in the areas I invest in, others may say you need 50 to be successful.

I usually use CAP rate but GRM is what residential appraisers tend to use with a focus on comparable sales approach.

I like income approach better but its only more heavily relied upon in 5+ units or commercial and business appraisals where market value is determined as a multiple of net income or earnings.

Should I use the purchase price as the numerator or total acquisition cost: meaning purchase price+closing costs+renovation costs+cost to list?

Originally posted by @P R :

Should I use the purchase price as the numerator or total acquisition cost: meaning purchase price+closing costs+renovation costs+cost to list?

Thats a very good question. You'd use purchase price as your "numerator," on GRM calculations since its price over gross income whether monthly or annual while CAP rate expresses the net income over price. They are the inverse of each other and they both tell different stories that are equally important to know so you can quickly gauge the opportunity of the deal you have before you.

I do my acquisition CAP, interim CAp, and potential selling CAP rate to determine wheres the value add in the deal and I will look at GRM too to see if there is potential that is left on the table.

Hope that helps. 

Originally posted by @P R :

Should I use the purchase price as the numerator or total acquisition cost: meaning purchase price+closing costs+renovation costs+cost to list?

You can only use the purchase price after the fact! Too late. You should use the market GRM times the GSI to arrive at market value.

Hey there ! How to get average GRM in my area to appraise a property ? Same question for Cap Rate. And is it a good way to estimate the value of a property before submitting an offer ?

Originally posted by @David Amsallem :

Hey there ! How to get average GRM in my area to appraise a property ? Same question for Cap Rate. And is it a good way to estimate the value of a property before submitting an offer ?

HI David,

In the above responses within this thread we talked about GRM and how to determine it.

Its basically sales price / monthly gross rent if you want to get monthly GRM and sales price / annual gross rents to get annualized GRM.

On the monthly GRM I prefer to see a GRM of 100 or less which to me basically indicates a 1% rule because a 100,000 sales price property that rents for 1000 per month or 1% rent rule will be at 100 GRM monthly or 8.333 GRM based on annual gross rents ( 100,000 sales price / 12,000 gross rents (1000 per month X 12 months) = 8.333)

Hope that helps deciphering what the heck a GRM is and how to gauge its usefulness and its pitfalls. It doesnt tell you how well the expenses are being managed, just how the current gross rental income stacks up or what the potential GRM can be at. If you want to gauge expenses you may want to move towards doing a capitalization rate or cap rate which is a gauge of net rental income to the sales price (NOI / Sales Price = cap rate).

@Jordan Vires GRM norms depend on the area. I know I like them as a quick way to look multi-unit price as a “sanity check”. I know what I’ve bought, what other units have gone for, etc. so it’s not too hard to get averages for a newer vs. older GRM in a given area. Now where it gets a little screwy is that so many people are looking for value-add properties with below market rents. So then your “current” GRM could be different that your “projected” GRM. And *LOTS* of realtors love to price based on “what they think it could rent for”...which is usually high...and you’re bound by current leases until they expire...and when you raise rents you’ll be primping units and tenants will bail...etc. So the net result is that you have to back a lot of costs (holding, stabilization, etc.) costs out of you want to look at projected rents and GRM as a proxy for value.

Here in Oregon, California and Washington it is rather difficult to find a property with a GRM lower than about 10 (near any major city) in the current real estate market.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here