The MrRental Blog

Gross Rent Multiplier Formula

by Jes Herman May 3rd, 2010

The Gross Rent Multiplier (GRM) formula is an “income” approach of determining the value of a rental property. It’s a formula that measures the gross annual rents relative to the purchase price, and it’s a great way to compare income producing properties. The GRM does not, however, take into consideration any debt servicing, taxes, or operational expenses, but it can help you estimate how much your rental property is worth today, and how much it will be worth if you raise the rents. To calculate the GRM, simply take the purchase price and divide it by the gross scheduled annual rents.

GRM = Purchase Price / Gross scheduled income

So, if a property just sold for $100,000 with annual rents of $10,000, the GRM would be 10. In other words, the purchase price is ten times the annual rents. When you know the GRM you can use it to determine the value of a rental property. In the example earlier, let’s say that we purchased that property for $100,000 and we are getting $10,000 in scheduled gross annual rent. Since we know that the GRM is 10, we can determine how much our property can be worth if the rent were increased. Let’s say our rent increase now gives us $12,000 per year. That slight rental increase can have a huge impact on the value of the property.

Property Value = GRM x Gross scheduled income

Our example shows that a $2,000 increase in annual rent, with a GRM of 10, will increase the value of the property to $120,000! That’s a $20,000 increase!

Determining the GRM for your property is not isolated to that property, you want to find out what the GRM is in *the area* of a given property. Your property might be a 10 however the area average could be higher or lower. The point is that you want to have an accurate GRM for your property and that requires a little due diligence so that you know the GRM rate in *your* area. That being said, the GRM is a great way to compare your rental property to the market. But again, the GRM has limitations so it’s important to know what they are when you are using the GRM formula.

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