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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Gross Rent Multiplier
If you are a real estate investor looking to buy an investment property, there are many aspects of the property that you might want to consider before investing in the property.
Many real estate investors would like to know the net operating income, vacancy rate, locations, and amenities before they purchase any investment property.
One such important aspect to consider before buying an investment property is the gross rent multiplier. In this post, we will understand what is a gross rent multiplier in detail.
What Is The Gross Rent Multiplier?
The Gross Rental Multiplier (GRM) is a formula used by real estate investors to compare the potential rental income of different comparable properties.
This valuation method is a simplified way to analyze a property’s buying worth compared to its value without performing a full analysis.
Real estate investors of all skill levels use this formula to quickly compare properties in their portfolios and make quick investment decisions.
It should be noted that GRM should not be used as a substitute for a thorough analysis of the investment property.
GRM helps investors to make a purchase decision for investment real estate based on comparable properties in a given market.
What Is The Importance OF GRM in Real Estate Investment?
Real estate investors actively looking for real estate would have more than one property that they are looking at.
They need to find a way to quickly evaluate opportunities so they can spend time in an in-depth analysis of the best property from all the potential options.
The GRM of the property will help the investors to determine on which property they can focus and conduct an in-depth analysis.
However, this doesn’t mean that you should ignore the fact that there could be other properties with better GRMs.
Lenders would evaluate an investment property based on several parameters and ratios to provide financing.
Income generated by the property and profitability is considered a few of the most important parameters by the lenders for qualification.
Knowing what a GRM is for the real estate you are planning to buy may help you to be prepared for the qualification of the loan.
However, other parameters that the lender would require to finance your investment property may include your credit score, assets, income, debts, etc.
What Is The GRM Formula?
Let’s look at the gross rent multiplier formula. This formula will help you to calculate the GRM for an investment property.
GRM = Current Market Value ∕ Annual Gross Rental Income
Example: $275,000 Current market value ∕ $36,000 Annual Gross Rental Income = 7.6 GRM
The GRM formula is used to compare the investment property’s current market value to its annual gross rental income.
As you can see from the above-mentioned example, it would take approximately seven and a half years to recoup the price of the property.
However, it is important to note that other expenses such as facility maintenance, vacant lots, insurance, and property taxes are not included in the GRM calculation.
However, GRM is only a calculation to help you make the right decision between comparable properties without considering these other costs, as these costs vary from property to property.
What Is Considered To Be A Good Rent Multiplier?
In our example, a GRM of 7.6 years was achieved. This number depends on several factors. Importantly, as real estate prices rise and the market cycle lengthens, the GRM will decline gradually.
Early in the real estate cycle, when the market is coming out of a downturn, GRM is usually relatively low as liquidity slowly begins to flow and investors return to buying real estate.
In such situations, high single-digit GRMs can be common. Once the market catches up and the availability of cash is higher both for lenders and investors, the GRM tends to go higher.
Conclusion
The gross rent multiplier is an easy-to-use calculation even if you are new to real estate investment with the possibility of error being minimized compared to other complex calculations.
In just a few seconds you would be able to make your decision on whether or not you should proceed to go further with the investment property purchase.
One thing to keep in mind while calculating GRM is that you need to compare it with properties with similar configurations in the neighborhood.
This will help you get more accurate results and make an informed decision.
