Gross Rent Multiplier
Encyclopedia
Gross Rent Multiplier or "GRM" is the ratio of the price of a real estate
investment to its annual rental income before expenses:
Gross Rent Multiplier (GRM) = Sale Price / Potential Gross Income
The GRM is useful for comparing and selecting investment properties where operating costs can be expected to be uniform across properties. In this case, a property value may be estimated using the following related formula:
Sale Price = Gross Rent Multiplier x Potential Gross Income
It is important to beware of the limitations of the gross rent multiplier. For some properties, gross rents may include funds that a landlord must spend on utilities, while the tenants of other buildings may pay for utilities themselves. Various property-specific items are not captured when using the GRM. If one property has higher taxes or higher vacancy than the next, then using the GRM to calculate values will be deceiving.
The common measure of rental real estate value based on net return rather than gross rental income is the Capitalization Rate
or Cap Rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return. A similar multiplier to the GRM derived from net return would be the multiplicative inverse of the Cap Rate.
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
investment to its annual rental income before expenses:
Gross Rent Multiplier (GRM) = Sale Price / Potential Gross Income
The GRM is useful for comparing and selecting investment properties where operating costs can be expected to be uniform across properties. In this case, a property value may be estimated using the following related formula:
Sale Price = Gross Rent Multiplier x Potential Gross Income
It is important to beware of the limitations of the gross rent multiplier. For some properties, gross rents may include funds that a landlord must spend on utilities, while the tenants of other buildings may pay for utilities themselves. Various property-specific items are not captured when using the GRM. If one property has higher taxes or higher vacancy than the next, then using the GRM to calculate values will be deceiving.
The common measure of rental real estate value based on net return rather than gross rental income is the Capitalization Rate
Capitalization rate
Capitalization rate is the ratio between the net operating income produced by an asset and its capital cost or alternatively its current market value...
or Cap Rate. In contrast to the GRM, the Cap Rate is not a multiplier but a rate of annual return. A similar multiplier to the GRM derived from net return would be the multiplicative inverse of the Cap Rate.