What Is GRM in Real Estate and How to Use It?

If you are a real estate investor, you may have heard of the term GRM, or gross rent multiplier.

An image of GRM in Real Estate?
What is GRM in Real Estate?
Si Valeo Real Estate

But what does it mean and how can you use it to evaluate potential rental properties?

In this article, we will explain what GRM is, how to calculate it, and what are its advantages and limitations.

What Is GRM in Real Estate?

GRM, or gross rent multiplier, is a tool real estate investors use to estimate the potential return on their investment.

The GRM is calculated by dividing the property’s purchase price by the monthly rental income.

For example, if a property is purchased for $100,000 and the monthly rent is $10,000, the GRM would be 10.

The GRM is a simple way to compare different properties based on their price and income.

The lower the GRM, the faster the property will pay for itself and the higher the return.

The higher the GRM, the longer it will take to recover the initial investment and the lower the return.

How to Calculate GRM Using a Simple Formula

Calculating the GRM is easy.

You just need to know two numbers: the property’s purchase price and the monthly rental income.

Then, you can use the following formula:

For example, let’s say you are considering two properties: A and B. Property A costs $200,000 and generates $20,000 in monthly rent. Property B costs $300,000 and generates $25,000 in monthly rent.

To calculate the GRM for each property, you would do the following:

Based on the GRM, property A is a better investment than property B, because it has a lower GRM and a higher return.

What Are the Advantages and Limitations of GRM?

The GRM is a useful tool for real estate investors because it is quick and easy to calculate.

It can help you screen and compare multiple properties without having to do a full analysis.

It can also give you a rough idea of how long it will take to recoup your investment.

However, the GRM also has some limitations that you should be aware of.

The GRM does not take into account any expenses or costs associated with owning and operating a rental property, such as taxes, insurance, maintenance, repairs, vacancies, management fees, etc.

These factors can significantly affect the net income and the actual return of a property.

The GRM also does not account for any changes in the market value or the rental income of a property over time.

The GRM assumes that the property’s value and income remain constant, which is rarely the case in real estate.

A property’s value and income can increase or decrease due to various factors, such as supply and demand, location, condition, amenities, competition, etc.

Therefore, the GRM should not be used as the sole criterion for evaluating a rental property.

It should be used as a preliminary filter to narrow down your options and identify the most promising candidates.

Then, you should perform a more detailed analysis of each property, using other metrics, such as net operating income, cash flow, cap rate, internal rate of return, etc.

Conclusion

The GRM, or gross rent multiplier, is a simple and convenient tool for real estate investors to compare and contrast rental properties based on their price and income.

The lower the GRM, the better the investment.

However, the GRM does not consider any expenses or costs involved in owning and operating a rental property, nor any changes in the market value or the rental income of a property over time.

Therefore, the GRM should be used as a screening tool, not as a final decision tool.

You should always do a thorough analysis of each property before making an offer.

 

 

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