Real estate agents often use the gross rent multiplier to quickly determine the value of a property. The gross rent multiplier estimates the value of a property based on the property's potential income. This quick formula gives you a bird's eye view of the profitability of investing in a particular property unit based on the sales price and the estimated income for the property. The gross rent multiplier formula takes the sales price of the property and divides it by the potential yearly income. Once you have the gross rent multiplier, you enter that number into the formula for determining the estimated market value.
Locate the asking price of the properties you are interested in purchasing.
Calculate your yearly potential income for each property. This figure is the amount of income you expect to earn per year for the property in question. When considering purchasing a rental unit with multiple units, include the monthly income for each unit in the total monthly potential income. When calculating the gross rent multiplier, assume all available units are occupied.
Divide the sales price of the property by the yearly potential income. The resulting number is the gross rent multiplier. For example, if the sale price of a property is $180,000 and the income potential is $1,000 a month, the GRM is 15. By itself, the GRM is only a small indicator of the profitability of a certain property.
Calculating GRM is an easy way to compare different properties for sale. The lower the GRM, the better the deal may be. The calculation can give you an idea of which properties are worth a closer look.
GRM is only a quick method to determine a basic price valuation. It does not take into account operating expenses, vacant units, the general condition of the property or its location, which should all be significant factors in your ultimate buying decision.
- Fundamentals of Real Estate Appraisal; William L. Ventolo, Martha R. Williams
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