Gross Rent Multiplier- GRM
A great tool for estimating the value of properties. The GRM can give you an idea of what the property is worth, and or the income it should be producing. You require 2 pieces of information: Sales price, and the Potential Gross Income. If you have similar information of property in area, you can estimate values. It does not really matter if you do the estimates on monthly or yearly bases. You just have to know the averages. The equation is fairly simple:
GRM = Sales Price/Gross Income (done monthly or annually) Let’s look at a deal and see how we can use the information.
Example: Let us say the sale price of property is $100,000 and monthly potential rent is
$1,250 a month. That means:
GRM = Sales Price/Gross Income = 100,000/1,250 = 80 (monthly calculation). GRM = Sales Price/Gross Income = 100,000/15,000 = 6.67 (annual calculation).
If you know these are the averages for an income producing property, you can now “compare” income and value streams.
If the guy was asking 125k for the property, with the same income stream of $15,000. The GRM (annual) would be 8.3 (note a lower GRM is better). If you know the GRM should be 6, you know the asking price is too high. And or you know it is not worth that amount, because you can get a better deal elsewhere.
On the other side of the equation, you can estimate value of property or income stream, if you know the “average” GRM and any of the other two pieces of information. For example: Let’s say, the guy has income of 18,000 on a property, and does not really know what the value is, or you are negotiating the value. You can use the equation (relationships) and find out the value.
MarketValue = GRM x GrossIncomeorMV = 6 x 18,000 = $108,000
You can do the same if all you have is the Market Value and GRM average. Example: perhaps, you know they are asking, 108k for a property, and the GRM is 6. The income stream must be 18k or greater.
GrossIncome = MarketValue/GRMorGI = $108,000 / 6 = $18,000
The GRM is a basic guideline. It is not the only tool we use as a professional investor. Certainly, it is quick way to compare values, income streams, and get a good idea if the project is worth further evaluation. Likely from here we would do a cash flow analysis,
cap rates, and due diligence.