The Gross Rent Multiplier (GRM) is a ratio used in property investment analysis in order to assess the relationship between property value or asking price and the gross income that can be potentially earned by the property.
The formula for calculating GRM is the following:
GRM = Property Value or Price/Gross Rental Income
The gross rental income (GRI) is the annual rental income that the property can potentially produce. If the property is already fully occupied then the GRI is equal to the annual rental income as implied by the existing rental contracts. If it is not fully occupied then the GRI is the annual rental income that the property would produce if it were fully occupied (taking into account market rents for the estimation of the potential income for the vacant units).
For the sake of demonstrating the application of the formula let us assume that an investor is considering purchasing an apartment unit that is currently leased with a two-year contract at a monthly rent of £800 per month. Therefore, the annual gross rental income produced by the unit is £9,600 (12 × 800). Let us also assume also that the asking price for the apartment is £172,000. Then the gross rent multiplier can be calculated as:
GRM = 172,000 / 9,600 = 20
Thus, the estimated Gross Rent Multiplier is indicating that the asking price for the property under consideration is 20 times higher than the gross rental income that it can produce. If we have in mind a typical Gross Rent Multiplier for properties similar to the property under consideration that sold recently in the local market we can make a preliminary assessment as to whether the asking price is high or low compared to prevailing market prices. For example, if similar properties in the local market sold recently at a price representing a GRM not higher than 15 then the GRM of 20 sends a signal to the investor that the asking price for the particular property may be unreasonably high. However, such conclusion requires further investigation.
The GRM is a very inadequate measure for evaluating a property investment for a number of reasons including the inadequacy of the gross rental income in accurately representing the actual rental income that will most likely be earned by the property over the planned investment period. Read this article for a more detailed discussion of this issue.
A better measure and most commonly used ratio for evaluating the relationship between a property’s income-earning capacity and market value or asking price is the overall capitalization rate. This metric actually measures the net operating income (NOI) that is produced by the property as percent of its market value and is calculated as:
Capitalization Rate = NOI/Market Value or Price