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Gross Rent Multiplier GRM

GRM real estate is a simple tool investors can use to quickly compare income properties. The Gross Rent Multiplier in real estate is a sratio of yearly gross income to price. GRM is similar to PE ratio in the stock market. The Lower the GRM the better.

What is a Gross Rent Multiplier?

What is GRM? The Gross Rent Multiplier is simple tool investors can use to quickly compare real estate investments. The GRM is excellent for quickly sorting through income property listings to find the best investments for your investment criteria. While it is quick and easy, GRM completely ignores operating expenses, and things like capital improvements. If a property needs work add that to the price.  For the final decision the GRM may be too basic to rely on. Cap Rates take into account expenses that will more acurately reflect your true return. GRMs of under 10 cash flow great, Grms of 12-14 cash flow around breakeven with 20% down, Grms of 15-18 Needs 30% or more to cash flow breakeven. GRMs of 20 are sometimes paid for the best properties in teh best areas, but rarely will income property exceed 25 GRM. In markets like Los Angeles with rent control, the price can get very far away from the income.

What is a good GRM?

GRM

With GRMs the lower the GRM the better the cash flow, or the less money you need to put down to break-even cash flow. There is a relationship to the location of the real estate and GRM. Class A, Class B, and Class C real estate are commercial terms, that may sound confusing at first but worth knowing. The describe the desirability of the property and its location. Class C would be a low-income area with some deferred maintenance. Good example would be West Adams Class B would be maintained property in a medium-income area such as Miracle Mile. Class A is high-income new construction or totally remodeled like Beverly Hills or Santa Monica. Class C properties have a slightly higher risk than Class A and B for crime and tenant credit risk so they sell for lower GRMS than Class A and B. Class C real estate has excellent cashflow but is more management intensive, and has more risk. 

Gross Rent Multiplier Formula

How to Calculate Gross Rent Multiplier 

Gross Rent Multiplier Example

Let’s say you are considering buying a single-family home as an investment. The purchase price is $650,000 and the monthly rent is $2,800/mo. What is the GRM?

First you need to annualize the rent, so take $2,800 x 12 months = $33,600

 Take the purchase price $650,000 and divide it by the annual rent $33,600 = 19.34 GRM

 Houses usually have higher GRMs than Duplexes, Triplexes and 4 plexes, and Apartment buildings usually have lower GRMs even still. 

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