The Gross Rent Multiplier, also known as GRM, is a frequently used term in commercial real estate. It is a formula that helps agents who work with real estate investors to make a quick review of income properties, prior to making an in-depth analysis. If the GRM for a particular acquisition is too low or high, it’s usually not worth pursuing it any further.
You can calculate the GRM with this equation:
Property Price / Annual Gross Income = Gross Rent Multiplier
For example, say a property sold for $500,000 and the annual income was $100,000. Put these numbers into the calculation and the GRM would be 5.
Why Does the Number Matter?
Many investors are actively searching for properties, and this formula can give you a general idea of the current return before spending a lot of time on detailed analysis. If the GRM is higher, you can expect a lower cap rate, which generally means that the property is positioned for appreciation, and has better quality tenants. Alternatively, a low GRM usually suggests that the operating costs are higher, and you can also expect a higher vacancy rate, and additional turnover costs.
Use the GRM to Determine the Market Value
Say that you’re analyzing recent comparable properties and found that their GRM averaged to 5 (like the number used before). But now you want to know the approximate the value of the property you’re considering. Assuming that the annual rental income is $50,000, your calculation would appear like the example below:
GRM (5) x Annual Income ($50,000) = Market Value ($250,000)
If the property is listed well above this market value number, you might not want to consider this purchase. For example, if it’s $1,000,000, you might want to look elsewhere.
The 1% Rule
The 1% Rule means that the gross monthly rent should be at least one percent of its final price. If a property costs $200,000, the gross rents should be at least $2,000 per month. If another property costs $100,000, the rent price should be $1,000 per month.
Summary
Use the 1% rule, in addition to the Gross Rent Multiplier, to help you decide that a property is a viable option before committing to the full due-diligence process. After using these, and other simplified formulas to narrow down your search, you can then proceed to the full analysis and possibly even an offer. However, don’t make the mistake of applying only the 1% Rule and the GRM by themselves, as further analysis is required before making a major investment decision. That being said; the 1% Rule and the GRM are great strategies to apply, so make sure you take them into consideration if you’re looking for searching for a new acquisition.
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