GRM & Market Value Questions

[Sonya B.]

Hello all,

I've been researching how to analyze multi-family units (put together a spreadsheet and everything - look at me doing big things, ha!) and I've come across the GRM calcuation. I found a site explaining how to calculate GRM (Purchase Price / Annual Gross Income = Gross Rent Muliplier {GRM}) - great. But the article also covers a calculation on market value (GRM * Annual Income = Market Value).

The example given is: 

- Property sold for $750,000 / $110,000 Annual Income = GRM of 6.82

- Let's say that you did an analysis of recent comparable sold properties and found that, like the one above, their GRM's averaged around 6.75. Now you want to approximate the value of the property being considered for purchase. You know that its gross rental income is $68,000 annually.

- 6.75 (GRM) X $68,000 (Annual Income) = $459,000 (Market Value)

- If it's listed for sale at $695,000, you might not want to waste more time in looking at it for purchase.

My question is: 

1. For all of you seasoned investors (evaluators) out there, are these the calculations you would use together to determine if a property is overpriced?

2. Is there a general recommended rule of thumb for how far OVER market value an investor should consider going over before walking away (I'm sure this is a personal decision but I just mean generally)?

Thanks a ton in advance for answering.

[Anthony Chara]

Hi Sonya, I do not use the GRM calculation at all in determining value of my apartment complexes. The ONLY time I use GRM is when I am comparing my subject property to other similar properties that have sold in the market. I then compare my GRM to the solds to see if I'm in the ballpark.