Gross Rent Multiplier (GRM)

Gross Rent Multiplier Calculator (GRM)

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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1. Real Estate Property Rental Income Calculation Example

Suppose a real estate investor is considering purchasing a multifamily 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.

2. Gross Rent Multiplier Calculation Example (GRM)

In the next section, we’ll divide the property’s fair value by the gross annual income of the property to calculate the gross rent multiplier (GRM).

• Gross Rent Multiplier (GRM) = $480k ÷ $60k = 8.0x

In conclusion, the 8.0x gross rent multiplier (GRM) implies that the multifamily real estate property investment should take approximately eight years for the investor to recoup the initial investment and become profitable.

What is a Good Gross Rent Multiplier?

As a general rule of thumb, the lower the gross rent multiplier (GRM), the more profitable the property is likely to be (and vice versa).

Why? A lower gross rental multiplier (GRM) implies a shorter payback period and greater upside potential in terms of deriving more profits over time.

Therefore, the lower the gross rent multiplier (GRM), the higher the expected rate of return (i.e. yield) received by the real estate investor.

GRM vs. Cap Rate: What is the Difference?

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.

Contrary to the gross rent multiplier (GRM), the higher the cap rate, the higher the expected return on investment (ROI) – all else being equal.

The net operating income (NOI), a critical input when calculating the cap rate, subtracts various types of operating expenses such as unit repairs, vacancies, property taxes, and insurance.

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.