What is a Gross Rent Multiplier?

Although we only see it infrequently used in Central Oregon, the Gross Rent Multiplier (GRM) is a fairly commonly used metric in the larger real estate industry for determining the relative value of income-producing properties. It is calculated by dividing the sale price of a property by the annual gross rental income. For example, if a property is sold for $1,000,000 and the gross annual rental income is $100,000, the GRM would be 10.

The GRM is often used by real estate investors, lenders, and appraisers to quickly compare the relative value of different properties. It can also be used to estimate the potential value of a property based on its rental income. For example, if an investor knows that a similar property in Bend, Oregon, sold for a GRM of 12, they can use that information to infer the potential value of a property with a gross annual rental income of $100,000 to be $1,200,000.

One of the main advantages of using the GRM is that it is a simple and easy-to-use metric that doesn’t require information on property expenses. It is also pretty widely understood in the real estate industry. We know several investors, as an example, that grab GRM 12’s every chance they get. However, it is important to note that the GRM is not a perfect metric and has some limitations.

One limitation of the GRM is that it does not take into account the expenses associated with owning and operating a property. These expenses, such as property taxes, insurance, and maintenance costs, can significantly impact the net income and overall value of a property. Therefore, it is important to use the GRM in conjunction with other metrics, such as the Capitalization Rate (Cap Rate), which takes into account these expenses.

Another limitation of the GRM is that it does not account for the condition or quality of the property. A property that is in poor condition or in need of significant repairs may not generate as much rental income as a similar property in good condition. Therefore, it is important to consider the condition and quality of a property when using the GRM.

In addition, GRM can also vary by location, type of property, and market conditions. For example, properties in desirable locations or in markets with high demand for rental properties may have a higher GRM than properties in less desirable locations or in markets with less demand. Similarly, properties that are in good condition and well-maintained may have a higher GRM than properties that are in poor condition or in need of significant repairs.

Later, I’ll dive a little farther into the difference between GRM and Cap Rate and when and why we use each in the Central Oregon market.

Pro Summary: Gross Rent Multiplier is a commonly used metric in the real estate industry for determining the relative value of income-producing properties. It is calculated by dividing the sale price of a property by the annual gross rental income. It is important to keep in mind that the GRM has some limitations, such as not taking into account expenses and property condition, and can vary by location, type of property, and market conditions. Therefore, it is important to use the GRM in conjunction with other metrics, such as the Capitalization Rate, and to consider the condition and quality of a property, as well as the location and market conditions.