Table of Contents
The gross rent multiplier is a financial term that was popularized by the television show Shark Tank. It can be used to calculate how much you will spend on your housing costs each month, if you were to use the median American household income as your annual salary.
The “gross rent multiplier calculator” is a tool that allows users to calculate the gross rent multiplier for their property. The formula for calculating the GRM is as follows: Gross Rent Multiplier= (Rent-Operating Expenses) * (1/Gross Rent).
The gross rent multiplier (GRM) is a metric used to assess multi-unit and commercial real estate assets that generate revenue. It calculates a ratio by dividing the building’s price by the gross rentals, which may be compared to other comparable investments in the same market.
How Does the Gross Rent Multiplier Work?
There are two uses for the gross rent multiplier. If you know the building’s price and the rent roll, you may compare and contrast it with comparable investment properties. If you are familiar with GRM in your region and have access to the rent roll, you can rapidly estimate the worth of a building.
The gross rent multiplier (GRM) is also known as the gross rate multiplier, and the gross income multiplier (GIM) if other sources of revenue, such as onsite coin laundry, are taken into account. Although the formula isn’t an assessment technique, it is used by investors to do due research before to making an offer.
In other words, it may be used as a filter to assist you reject a possible property, keep one under review, or utilize the numbers as a negotiation weapon.
How to Work Out the Multiplier for Gross Rent
The formula for calculating the gross rent multiplier is as follows:
Price of a Home / Rental Income Gross = Gross Rent Multiplier
There are just three figures involved: the Price of a Home, gross rental revenue, and the GRM. You can get the third number by multiplying two of those numbers together.
Price of a Home
This is self-explanatory if you already have this figurine on hand. However, bear in mind that the GRM equation might help you guesstimate a building’s prospective price if you’re seeking to evaluate its worth or negotiating a possible price.
Rental Income Gross
Gross property income can be examined two ways. Rental Income Gross looks only at the potential rent roll. Sometimes a different slant is used, referred to as gross scheduled income or just gross income, which adds the rent roll and other income sources (ex. coin laundry) for the property. Either approach can be used, but neither factors in vacancies or expenses. In calculating GRM, whichever income figure is used is usually expressed as an annual amount, not as monthly one.
Gross Rent Multiplier Formula Examples
Let’s go through three different calculations using the gross rent multiplier formula: one to compute GRM, one to determine potential pricing, and one to estimate prospective rents.
Using the Asking Price and Gross Annual Rents to Calculate GRM
Let’s pretend you have the following data: a four-unit structure with a $400,000 asking price and gross yearly rentals of $38,400 Keep in mind the formula:
Price of a Home / Rental Income Gross = Gross Rent Multiplier
As a result, GRM would be:
$400,000/$38,400 = 10.42 GRM
Is 10.42 a reasonable number? You haven’t figured it out yet. You’ll learn how GRM’s value is local in nature and may be utilized to compare and contrast other properties in the same market later on.
Using GRM to Estimate Price of a Home
Let’s pretend you’re familiar with the GRM of your local stadium. Let’s imagine you’re searching for an investment and have found a potential option, but the asking price isn’t in line with local market values. You can use GRM to help you figure out how much the building might cost. The formula is as follows:
Potential Price = Rental Income Gross x Gross Rent Multiplier
Assume you’re looking at a multi-unit complex with a $54,000 yearly rent roll. You’ve done your research and discovered that the GRM in your neighborhood is about 8.5. You may estimate a price based on this information:
$54,000 multiplied by 8.5 equals $459,000 as a potential price.
Estimating Expected Rents using GRM
One last approach is to use GRM to help compute what a building’s rent roll should look like. You can obtain a sense of what gross rents should be if you have the asking price and know your market’s GRM:
Rental Income Gross = Price of a Home / GRM
Let’s assume you find a seller asking $399,000 for a four-unit structure, but the seller is reluctant to provide gross rent data. Let’s suppose you know the GRM of your market is 9.4. You may obtain an estimate of what the gross rentals should be by looking at the following:
Rental Income Gross = $399,000/9.4 = $42,447
Then you may compare that estimated sum to what the landlord really gives you.
GRM Template for Free
Use our free downloadable template for computing gross rent multiplier or Price of a Home. If you have 2 of the 3 important figures, you can use it to quickly compute the 3rd.
Download GRM Template for Free
Advantages & Limitations of Gross Rent Multiplier
Although the gross rent multiplier has numerous uses, it is not a technique utilized in property appraisal. In order to utilize it properly, you must be aware of both its benefits and limits.
The Gross Rent Multiplier’s Benefits (GRM)
The gross rent multiplier is one of several tools available to assist you assess an income-producing property’s financial performance. It may be used to swiftly evaluate a property’s potential before making an offer on a repossessed house or bidding at an auction. GRM is a useful tool for both buyers and sellers.
GRM Is More Effective Than a Price-Only or Price-Per-Unit Exam
Because it doesn’t take into account the revenue produced, price alone isn’t a very effective predictor of value for an investment property. Even if you compare the prices of two buildings, you can’t adequately assess the offer until you look at the revenue potential. GRM takes into account revenue in proportion to pricing.
Price-per-unit is another frequent method for evaluating rental property prices. Although price-per-unit is a useful tool for comparing comparable properties, such as apartment complexes or multi-family residences, it still suffers from the issue that GRM fixes. GRM, on the other hand, takes into account the rent roll, while cost-per-unit does not.
GRM is a powerful tool for identifying potential properties.
The gross rent multipliers are not a method for determining the value of a property. Its principal function is to screen properties, enabling you to compare and contrast possible investments to evaluate which ones provide the greatest potential in terms of rent and/or price.
Both buyers and sellers may benefit from using GRM.
Because the gross rent multiplier is a ratio of price and rent, every change in one of those values affects the calculation’s output. Depending on how it relates to the normal GRM for your region, this statistic may benefit the seller or the buyer.
If you’re a seller, you want to see a GRM that’s a little higher than market since it means you’ll receive a little more for your home. If you’re looking to purchase, you want to see a GRM number that’s a little lower than usual since it might indicate that the price is below market. It might also suggest that rentals are a little more than comparable properties.
The Gross Rent Multiplier’s Limitations (GRM)
GRM is not without flaws. It does not, for example, account for vacancy or running expenditures, both of which are important aspects of a building’s total profitability.
GRM Doesn’t Take Vacancies Into Account
Vacancies are not taken into account since the gross rent multiplier utilizes gross scheduled rentals. Because all buildings contain vacancies, and vacancy rates are greater for worse performing structures, this is a significant constraint. There’s a big gap between what a building can bring in and what it really produces, and GRM doesn’t take it into consideration.
Expenses are not taken into account by GRM.
Expenses are an unavoidable part of any revenue property. The gross rent multiplier, on the other hand, ignores the spending side of the equation. Only total rent is used, not net rental revenue after costs. GRM’s removal of operational expenditures is noteworthy since they might vary greatly from one structure to the next.
Capitalization Rate vs. Gross Rent Multiplier
The capitalization rate, or simply cap rate, is a relative of the GRM. Net operating income is used to calculate cap rates, which takes into account both vacancy and operating expenditures. Cap rates outperform GRM in this aspect, however they need a little more work to calculate. In any case, while considering possible investments, a knowledgeable investor should consider both cap rate and GRM.
Only in comparison to other properties is the Gross Rent Multiplier useful.
Because real estate prices and rent levels vary by city, gross rent multiplier estimates range from market to market. You can’t just state a structure has a “good” GRM. For the number to be significant, it must be compared and contrasted with other properties in the region.
Let’s assume you’re considering two investment properties, one with a GRM of 13.0 and the other with an 8.10 GRM. You can’t just decide that one of them is excellent and the other isn’t. On the other hand, if you know that your market’s average GRM is 10.0, you have a benchmark to work with. You’d probably focus on the first attribute while ignoring the second. Why? Buyers, as you may remember, want lower GRM since it may signify a cheaper price or greater rent than the market. You were able to make your selection by comparing each property to the GRM of the surrounding region.
Final Thoughts: Gross Rent Multiplier
The gross rent multiplier is a measure for appraising rental properties and real estate investments. To arrive at a number to compare comparable investments within a particular market, the method utilizes the building’s price divided by gross rentals. GRM is useful for sifting through possible investments, but it is restricted since it ignores vacancies and costs.
The “gross rent multiplier vs cap rate” is a tool that will help you calculate and understand the gross rent multiplier. The GRM is calculated by dividing the total revenue in your property by its net operating income.
Related Tags
- monthly gross rent multiplier formula
- gross rent calculator
- what is a good gross rent multiplier
- gross rent multiplier by city
- gross rent multiplier vs gross income multiplier
