The Gross Rent Multiplier (GRM) calculator is a vital tool to assess an investment property’s profitability. Real estate investors use the GRM calculation to compare properties based on their projected gross income and market value.
Also called the Gross Income Multiplier, the GRM calculator relies on two figures—the property sale price and monthly income from rent. Using these values, the GRM calculator gives you a useful metric that determines if the property is worth investigating more. The calculation results predict the number of years it would take for the property to pay for itself.
A lower figure represents a better potential the investment.
Using the GRM calculator has three significant benefits. These are:
- The Gross Rent Multiplier is simple and straightforward to use
- You can use figures that you already know—annual rent and property value
- GRM calculations can help compare similar properties to spot lucrative investments
Every successful property investor should know the basics of using the GRM calculator. The formula uses the ratio of the property’s fair market value to the gross rental income. The results of the calculation express the potential value of the investment.
Here is how the simple GRM calculation works:
Let’s look at a few examples to see how the GRM calculator works practically.
Let’s say that you are thinking about buying an investment property that is selling for $650,000. You know that the average monthly rental income is $7,300. To calculate the gross rent multiplier, you should multiply the monthly income by 12. Now you have the figure for gross annual rent—$87,600. You use the two values to calculate the gross rent multiplier this way:
Gross rent multiplier = $650,000 ÷ 87,600 = 7.42.
The result of the GRM calculation is the number of years it will take for the investment to pay for itself.
As you can see from the way the gross rent multiplier works, it’s straightforward and easy to use. What’s more, you can also use the GRM to know if it’s possible to make the investment more lucrative. For example, if you were able to negotiate a better selling price—say, $625,000—the GRM would drop to 7.13. Or, could you increase rent to boost your net income?
The GRM calculator is a powerful real investment tool if you’re involved in property management. You can use it to compare similar properties in similar neighborhoods.
You can also use the calculator to identify potential profitable investments. For example, the cheaper property may not always represent the best investment when taking into account gross annual rent.
Here is a way to use the GRM calculator to compare real estate in similar asset classes:- Property #1—Selling for $900,000 with a gross annual income of $72,000. GRM is 12.5.
So, in terms of real estate investing, the GRM calculation shows that property #3 is worth carrying out due diligence.
It’s worthwhile remembering that the GRM calculation is only the start. After using the calculator to identify potential profitable investments, its crucial to dig deeper to crunch more numbers. For example, the calculator doesn’t take into account risk factors or any of the following:- Operating expenses
To calculate other metrics of investing in real estate, such as Cash on Cash Return (CoC) or Return on Investment (ROI), you should use other calculators.
The Gross Rent Multiplier is a vital tool for assessing potential properties in real estate investing. Use the GRM calculator to narrow down the search for your next investment, track property values, and help your rental property business grow.
Gross annual rent
Gross rent multiplier
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