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Gross Rent Multiplier (GRM)

Gross Rent Multiplier (GRM)

What is the Gross Rent Multiplier?

The Gross Rent Multiplier, abbreviated as GRM, is used to compare similar investment properties in an area. Since investors typically have a limited quantity of investable funds, this is a useful metric especially if you have competing opportunities.

All things being equal, a lower Gross Rent Multiplier means you'd be able to use the rental income and pay off your properties faster. Lenders often care about this metric as it helps them assess whether or not the borrower would be able to pay off the loan.

How do I calculate the Gross Rent Multiplier?

A good Gross Rent Multiplier is a number less than 7.

\[ {Fair \, market \, value \over Gross \, annual \, rental \, income } \, where \, lower \, is \, better \]

Example

Imagine I'm looking at two rental units:

  • Rental property 1: $1000/mo in rent
  • Rental property 1: $2000/mo in rent

If both of these properties cost the same ($150,000), Rental property 2 has a better Gross Rent Multiplier.

  • Rental property 1: $150000 / ($1000 * 12) = 12.5x
  • Rental property 2: $150000 / ($2000 * 12) = 6.25x

GRM considerations

When you think about the Gross Rent Multiplier, make sure you consider the following:

  • The GRM does not take into account how much you actually pay back as it's a hypothetical measure. If an investor pays back the loan more aggressively,
  • If the monthly rent assumptions change, the GRM can change drastically. You may be able to increase the monthly rent value if you upgrade the property.
  • If the fair market value increases, the GRM can change drastically. You may be able to increase the fair market value with rehabs and renovations.
  • The GRM does not account for vacancies nor operating expenses. Though, property investors may not have perfect information around a property's performance during the purchase so the GRM can still be a useful guideline.

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