The Gross Rent Multiplier (GRM) is a valuation metric used in the real estate investment industry. It’s calculated by dividing the purchase price of a property by its gross annual rental income before expenses.
GRM = Purchase Price / Gross Annual Rental Income
The Gross Rent Multiplier is used to compare different investment properties. A lower GRM typically indicates a more profitable investment, assuming all other factors are equal. This is because it suggests that the purchase price is low relative to the rental income that the property can generate.
However, the GRM doesn’t account for operating expenses, financing costs, or vacancy rates, so it’s typically used as a preliminary screening tool or a quick rule of thumb rather than a definitive valuation method.
As a result, investors usually utilize other metrics such as Net Operating Income (NOI), Capitalization Rate (Cap Rate), and Cash on Cash Return in conjunction with GRM to provide a more comprehensive evaluation of real estate investment opportunities.