One of the simpler ratios to calculate for potential rental investments is the gross rent multiplier. In itself, it’s not enough to greenlight a property as a good investment, but it’s so easy to calculate that you can do it in a few seconds. Which, in turn, can help you decide if the property is worth a closer look.
The gross rent multiplier is a property’s price divided by its gross annual rents. The gross rent multiplier tells you how many years it would take for a property to pay for itself in gross rents.
Example: A property priced at $180,000. The monthly rent is $1,500, which means the annual gross rents are $18,000. The GRM is 10 (Purchase Price / Annual Gross Rents).
In a perfect world with no expenses (remember that we’re talking about gross terms/amounts and not net), it would take ten years for the rents to pay for the property in this hypothetical example. In case it’s not obvious, a lower number is better when it comes to GRM.
Why GRM Matters
As a ratio of a property’s rent to its price, the Gross Rent Multiplier is a loose indication of income yield. Theoretically, the better the ratio, the better the investment. GRM is simply another way of measuring the relationship between rent and price.
How To Use GRM
Gross rent multiplier can be used as a screening metric. If you’re browsing through dozens of properties for sale, you can calculate the GRM for each property very quickly. When the GRM is outrageously high, you can dismiss that property without spending a lot of time on it.
Limitation of GRM
The problem with GRM is that it ignores expenses and other challenges that vary from neighborhood to neighborhood or property to property. While the gross rent multiplier only analyzes the purchase price and gross rents, using metrics like cap rate, or cash-on-cash return will give you a much more precise investment evaluation.
Gross rent multiplier works best as a broad screening tool: a way to identify cities, neighborhoods, and properties that show promise for rental investing. Use GRM for your large-scale research, and then gradually get more precise as you narrow in on specific neighborhoods and properties. Once you’ve honed in on potential properties, we’d love to sit down with you and put together a private lending plan to help accomplish your investment goals.