__Gross Rent Multiplier - GRM__

The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value

of income producing properties. It provides a rough estimate of value. Only

two pieces of financial information are required to calculate the Gross Rent

Multiplier for a property, the sales price and the total gross rents possible. If this

information is available for multiple sales of similar types of income properties in a

particular area, it can then be used to estimate the market value of other similar

properties in that area. Some investors use a monthly Gross Rent Multiplier and

and some use a Yearly GRM. The monthly GRM is equal to the Sales Price of a

property divided by the potential monthly gross income and the Yearly GRM is the

Sales Price divided by the yearly potential gross income.

Example 1: If the sales price for a property is $200,000 and the monthly potential

gross rental income for a property is $2,500, the GRM is equal to 80. Monthly

potential gross income is equal to the full occupancy monthly rental amount which

assumes all available rental units are occupied. Generally speaking, properties in

prime locations have higher GRM's than properties in less desirable locations.

When comparing similar properties in the same area or location, the lower the GRM,

the more profitable the property from an income perspective. This statement

assumes that operating expenses are proportionate for the properties being

compared. Since the GRM calculation doesn't include operating expenses, this

statement might not hold true for similar properties where one of the properties

has significantly higher operating expenses.

Sales Price $200,000

GRM (monthly) = ------------------------------------------- = ------------ = 80

Monthly Potential Gross Income $2,500

Example 2: We have several similar properties that have sold recently and their

average monthly GRM is 80. We can use this information to estimate the value

of comparable properties for sale. If our monthly potential gross income for a

property is equal to $3,000, we would estimate its value in the following way.

Estimated Market Value = GRM X Potential Gross Income

= 80 X $3,000 = $240,000

A market GRM can provide a rough estimate of value when consistent and

accurate financial information is available for sales of similar types of properties

in a particular market place, but it does have some limitations. Operating expenses,

debt service and tax consequences are not included in the GRM calculation. We

could have a situation where two properties have approximately the same potential

gross income, but one property has significantly higher operating expenses. The

above formula would result in a questionable estimation of the market value for

these properties. Also, the above GRM formula uses the monthly potential gross

income and doesn't account for a vacancy factor which could have an impact on

the accuracy of the property value estimates. This is why it is important to have

accurate and detailed financial information for comparable sales when establishing

a GRM or Cap Rate for income producing properties.

The GRM is sometimes calculated using the effective gross income rather

then the potential gross income thus incorporating the vacancy factor in the

GRM calculation. Effective Gross income equals potential gross income

minus the vacancy amount. When vacancy rates are a factor, using the

effective gross income will produce a more reliable estimate.

The capitalization rate is a more reliable tool for estimating the value of

income producing properties since vacancy amount and operating

expenses are included in the cap rate calculation. The GRM is useful

in providing a rough estimate of value.

The our real estate investment analysis calculates many different real estate

investment ratios including a monthly and yearly GRM ( gross rent multiplier). We

will calculate a Gross Income Multiplier (GIM) as you enter a properties financial

data. No need to use a calculator. Let our Team do the work. We will automatically

recalculate the GIM when you make changes to the sales price, rental income and other

income. We will provide a powerful investment analysis tool and it should be a part

of your arsenal.

**Tien and Jim**

*Your Real Estate Partners*