Calculating the GRM for sales comparables (recent sales)
Sales Price / Gross Annual Income = Gross Rent Multiplier (GRM)
The Property sold for $497,000 / $71,000 Annual Income = GRM of 7.00
Calculating the value of a property for sale:
Let us use this for an example; you are looking at comps for recently sold properties and found that the typical GRM averaged 7.00. Now you want to figure the value of the property you are looking to make an offer on. You know that its gross rental income is $71,000 annually.
GRM X Annual Gross Rental Income = Market Value
7.00 X $71,000 = $497,000
So now you have a basis for what a reasonable offer might be on that property.
Keeping in mind that you have not factored expenses into this equation.
Gross Rent Multiplier is the ratio of the price of a real estate investment to its annual rental income before expenses such as property taxes, insurance, and even utilities for vacation rental properties. Other expenses could include the cost of hiring a property management company. To sum up Gross Rent Multiplier, it is the number of years the property would take to pay for itself in gross received rent. For the investor, a higher GRM (perhaps over 20) is a poorer opportunity, whereas a lower one (perhaps under 15) is better.
The GRM is useful for comparing and selecting investment properties where depreciation effects, periodic costs (such as property taxes and insurance) and costs to the investor incurred by a potential renter (such as utilities and repairs) can be expected to be uniform across the properties (either as uniform values or uniform fractions of the gross rental income) or insignificant in comparison to gross rental income. As these costs are also often more difficult to predict than market rental return, the GRM serves as an alternative to a measure of net investment return where such a measure would be difficult to determine.
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.