What is Gross Rent Multiplier?
The Gross Rent Multiplier (GRM) compares a property’s fair market value to its expected gross annual rental income.
The ratio between a real estate property investment’s market value – i.e. the purchase price – to the anticipated annual rental income can estimate the number of years required for the property to break even and become profitable.
Table of Contents
- How to Calculate Gross Rent Multiplier (Step-by-Step)
- Gross Rent Multiplier Formula
- GRM vs. Cap Rate: Commercial Real Estate Investing Metrics
- Gross Rent Multiplier Calculator – Excel Model Template
- Step 1. Real Estate Property Rental Income Calculation
- Step 2. Gross Rent Multiplier Calculation Analysis Example
How to Calculate Gross Rent Multiplier (Step-by-Step)
The gross rent multiplier reflects the number of years it would take for a particular property’s gross rental income to pay for itself.
Most often, the GRM metric is used by real estate investors and other market participants to ensure a potential property investment can in fact become profitable.
In practice, the gross rent multiplier is more of a screening tool (i.e. a “quick and dirty” method) to determine the potential profitability of a real estate investment.
The GRM is not only useful for screening purposes, but also for assessing comparable properties.
The multiple shows the big picture in terms of profitability and helps investors decide whether a real estate property generates sufficient rental income to justify an investment in it.
To calculate the metric, only two inputs are required:
- Property Value → The fair market value (FMV) of the property as of the present date, i.e. the asking price at which the property can be purchased.
- Gross Annual Income → The estimated amount of rental income expected to be produced each year.
From those two figures, dividing a property’s fair value by its gross annual income yields the GRM.
As a general rule of thumb, the lower the gross rent multiplier, the more profitable the property is likely to be (and vice versa).
Gross Rent Multiplier Formula
The formula for calculating the gross rent multiplier (GRM) is as follows.
For example, let’s say that a property’s fair value is $300k and its annual gross income is projected to be $60k.
Given those assumptions, we can calculate the gross rent multiplier as 5.0x.
- GRM = $300k ÷ $60k = 5.0x
The 5.0x multiple suggests that for the property to break even, it would take approximately five years.
GRM vs. Cap Rate: Commercial Real Estate Investing Metrics
The capitalization rate, or “cap rate” for short, compares a rental property’s net operating income (NOI) to its fair value. Like the GRM, the cap rate is also used to evaluate returns and profitability in real estate.
The higher the cap rate, the higher the expected return on investment (ROI), all else being equal.
In comparison, the lower the gross rent multiplier, the higher the expected return.
A lower multiplier implies a shorter payback period and a greater potential to derive more profits over time.
Therefore, the capitalization rate is considered to be a more comprehensive, informative metric in real estate investing, but also more time-consuming to calculate. The GRM, however, is primarily used as a screening tool.
Gross Rent Multiplier Calculator – Excel Model Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Step 1. Real Estate Property Rental Income Calculation
Suppose a real estate investor is considering purchasing a multi-family property priced at $480k near the end of 2022.
- Fair Market Value (FMV) = $480k
The monthly rent charged to the future tenants is expected to be $5,000 in total.
In order to annualize our monthly rental income, we must multiply the monthly gross income by 12.
- Monthly Gross Rental Income = $5k
- Annual Gross Rental Income = $5k × 12 = $60k
The property investment will generate roughly $60k per year.
Step 2. Gross Rent Multiplier Calculation Analysis Example
The next step is to divide the property’s fair value by the gross annual income of the property to calculate the multiplier.
- Gross Rent Multiplier = $480k ÷ $60k = 8.0x
The 8.0x multiple implies that the property investment should take approximately eight years for the investor to recoup the initial investment and become profitable.