What is GRM in real estate: Choosing the right investments

Deciding which rental property to invest in can be a tad confusing – especially if you’re new to real estate investments. But don’t worry! There are some useful financial tricks you can utilize to figure out which property is the best money-maker. And, which is not. One of these tricks is called the gross rent multiplier (GRM). So, what is GRM in real estate, and how can it help you choose the right investments? Let’s find out, here. 

What is GRM in real estate?

The Gross Rent Multiplier (GRM) is a quick way for real estate investors to compare rental properties. It helps them determine how profitable similar properties might be in a certain area, based on how much money they make from rent each year.

This kind of metric is especially handy when rental prices are changing fast, as they are now. Investors can compare different properties by looking at how much rent they bring in now and what they could bring in if rents go up to match the market. It’s like sizing up properties based on their income potential. And, how is GRM calculated? You need to divide the property’s price by its yearly rental income to get the GRM score. 

A higher GRM means the property might be too expensive, while a lower GRM suggests it might be a good deal. A GRM between 4 and 7 is generally ideal. 

But remember, GRM doesn’t tell you everything. For instance, it doesn’t tell how long it will take to recoup your money because it doesn’t consider all expenses. Remember that it’s just one tool among many for evaluating a good investment.

When you’re looking at a rental property, you should also think about other parameters such as the cost of running the property, how often it might be vacant (and yield less monthly rent), and how much it could increase in value over time.

Is GRM the same as the capitalization rate or net operating income? 

GRM, cap rate, and net operating income (NOI) are three distinct metrics used in real estate analysis, each serving a different purpose. Let’s explore their roles individually. 

GRM is a straightforward calculation comparing a property’s market value to its annual gross rental income. It offers an easy way to assess a property’s value relative to its income potential. Keep in mind that it provides only a basic snapshot of a property’s value. 

In contrast, the cap rate measures the expected rate of return on an investment property by dividing its NOI by its value, factoring in operating expenses to give a clearer indication of potential profitability. A higher cap rate reflects a higher return on investment. 

NOI, on the other hand, reflects a property’s actual income after deducting all operating expenses, excluding mortgage payments and property taxes. It serves as a key indicator of a property’s financial performance. 

Read more: What is capitalization rate; commercial real estate?

What is the formula for calculating Gross Rent Multiplier?

The simple formula for calculating GRM is:

Gross Rent Multiplier = Property Price or Value / Gross Rental Income.

For example, if a property costs $1.8 million and brings in $300,000 in gross rental income, the GRM would be:

$1,800,000 / $300,000 = 6

How can property investors use GRM to evaluate properties?

GRM helps estimate a property’s value if it’s not listed. For example, if a property earns $80,000 a year and similar properties have a GRM of 6, the estimated value would be $480,000 ($80,000 x 6). It’s not exact, but it’s useful for quick comparisons.

You can also use GRM to estimate the expected rent. If a property is worth $900,000 and the area’s average GRM is 9, you can divide the value by the GRM to find the expected rent. In this case, it’s $100,000 ($900,000 ÷ 9). If the actual rent is much higher, it’s likely a good real estate investment; if it’s lower, it might not be as profitable.

Loan lenders also use GRM to assess a property’s value and compare it to similar properties when deciding whether to approve a loan. This helps them gauge the likelihood that the borrower will be able to repay the loan.

How can you boost your Gross Rent Multiplier? 

There are two ways to improve your GRM. You can either bump up the rental income or lower the sale price. For higher rental income, you can think about raising rents, adding more multi-family units, or offering new amenities to attract tenants willing to pay more. To cut the sale price, try negotiating with the seller or wait for the market to become more favorable. 

Last thoughts

GRM is like a handy tool for real estate investors, helping them sort through properties and make decisions. Both newbies and real estate pros use GRM to pick out the top rental properties to invest in. Remember, GRM is just one way to evaluate a property. You should also look at other factors such as cash flow, property condition, repair costs, cap rate, and debt service coverage ratio before making any investment decisions.

Even mortgage lenders pay close attention to GRM because it gives them an idea of a property’s income and profit potential. 

A good Gross Rent Multiplier might not be the final say on whether a property is a good investment or not. But, it’s a great place to start your decision-making process.

Read more: Investing in Greek properties

Written by Ramona Sinha. December 23, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.