Gross Rent Multiplier (GRM) 

When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property’s current or potential financial performance, helping investors gauge profitability and mitigate risks. Gross rent multiplier (GRM) is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures. 

What is Gross Rent Multiplier? 

Gross rent multiplier (GRM), in short, is the ratio of a property’s market value to its yearly gross rental income. GRM is a real estate metric used to evaluate and compare potential investments, functioning as a numerical instantiation of one property’s potential over another given different potential income and costs. 

Gross Rent Multiplier Formula 

Learning how to calculate gross rent multiplier is relatively straightforward. The gross rent multiplier calculation uses the following formula: 

Gross Rent Multiplier = Fair market value (FMV) / Gross rental income 

As you can see, the GRM formula has two key components: The property’s fair market value (FMV) and its gross annual rental income. We’ll explain both inputs in more detail shortly. 

When to Use Gross Rent Multiplier 

The gross rent multiplier can be used at any point during the evaluation stage of a property investment. Here are a few common uses of GRM: 

• As a quick initial screening method to include or rule out properties 
• During market analysis to get a general idea of how properties fare in a market 
• To compare similar properties in the same market 
• To decide whether a promising property is worth a more detailed analysis  

How to Use the Gross Rent Multiplier Calculator 

Using Innago’s gross rent multiplier calculator can help you quickly assess whether a property is likely to be a good investment based on its rental income. Below, we discuss the required inputs for the calculation as well as the output you’ll get. 

Inputs 

Here are the inputs you’ll need to use the gross rent multiplier calculator: 

1. Fair market value (FMV) 
2. Annual gross rental income 

Fair market value is simply the price the property would sell for on the open market assuming both parties are “reasonable knowledgeable” about the property and acting in their own best interests. FMV can be procured via an appraisal or by analyzing comparable properties. 

The bottom half of the formula is your annual gross rental income, or the total amount of rental income you receive (or plan to receive) from a rental property over a year, before making any subtractions for utilities, property taxes, maintenance fees, or other operating expenses (note this is not the same as net operating income, which does account for operating expenses).  

If you include ancillary income in this calculation beyond just rent (such as laundry or vending services), you will actually calculate what’s called the gross income multiplier. Gross income multiplier is a similar calculation as gross rent multiplier, only it accounts for all income received. 

Outputs 

After you’ve entered the above inputs, the calculator will output your property’s gross rent multiplier (GRM). Typical GRM values fall between 4 and 12. 

How to Interpret Your Gross Rent Multiplier 

What is a good gross rent multiplier? 

According to Rocket Mortgage, a GRM between 4 and 7 is generally considered to indicate a good investment. Here’s what your results from this calculation might mean: 

• Lower GRM (4–8): A lower GRM indicates that the property is priced relatively low compared to its gross annual income, meaning it might be a good investment in terms of cash flow. 

• Higher GRM (8–12 or higher): A higher GRM means the property price is higher relative to its gross rental income generated. This could indicate a more expensive property for the rental income it generates, which may signal slower returns. 

However, these ranges can vary depending on the market and location, so it’s important to analyze GRM within the context of the specific real estate market you’re evaluating.  

For example, let’s say you’re comparing two properties, Property A with a GRM of 6.5 and Property B with a GRM of 8.5. Property A seems like the better investment looking at the GRMs of the two properties alone. However, it could be that Property A’s relatively low GRM is primarily because of its low property value or purchase price rather than an abundance of potential rental income. The property may be priced low because it has major structural problems and needs substantial repairs, which would require substantial upfront cash not available to you at the time of purchase. Alternatively, Property A might be in an undesirable location, meaning you’d likely have trouble filling its units and would struggle with gross income loss due to vacancies. 

As you can see, while GRM is a useful metric, it cannot be considered in isolation. The context of your investment properties matters as well. GRM should be just one metric you use in a holistic analysis of an investment you’re considering. 

Conclusion 

Gross rent multiplier is one of the simplest metrics real estate investors can calculate to quickly compare rental properties based on income. While useful, it should be combined with other tools for a full picture. If you’d like to make more informed decisions and boost returns, start by trying Innago’s gross rent multiplier calculator above.