Gross rent multiplier – also referred to as GRM – is the best way to determine the current market value of a multifamily property because it measures the gross annual rents relative to the purchase price. This is an income approach to evaluating the value and is essential when vetting an investment property.
Understanding the gross rent multiplier value
The table below is a general range for GRM values with explanations on what the property should be according to Larry Loftis, the author of Investing in Duplexes, Triplexes, and Quads. Larry Loftis is an attorney who is also a real estate investment expert.
20 and above
Hot property in a hot area in a seller’s market. Even if you put down 20%, you’ll have negative cash flow. Appreciation should be outstanding.
17 to 20
Great property in a great area in a seller’s market. You’ll be lucky to get a positive cash flow with 15% to 20% down. Another appreciation play.
12 to 16
You may have potential here. This should be good to a great area. You may be able to break even with 10% to 20% down. Excellent appreciation.
8 to 11
This is a good range to shoot for if the area is okay, the property is in decent shape, and the tenants are not too bad. If you have all 3, don’t delay, it won’t last long. You should have decent cash flow with 10% to 15 % down. Decent cash flow, decent appreciation.
6 to 7
This will not be a good neighborhood. Cash flow will be excellent, but appreciation will be bad. You probably will not tell your cousin that you own this property.
You will not want to be here at night. Cash flow will be great if you can collect it. Don’t count on much appreciation; there are not many buyers for these properties.
Gross rent multiplier formula
GRM = Purchase Price / Gross Scheduled Income
Keep in mind that this method of valuation helps both buyers and sellers. Savvy sellers will make improvements to raise rents, thus raising their property values based on GRM values. If you live in an area with high GRM values, a small increase in rent can have a significant effect on your property value.
Investment Property Worksheet
While gross rent multiplier is an important metric to evaluate when vetting investment properties, there are more factors to consider. Download our investment worksheet to quickly calculate these key investment property metrics:
- Total Cash Flow
- Gross Rent Multiplier
- CAP Rate
- Monthly Net Operating Income
- Annual Net Operating Income
- Yearly Appreciation Rate