UNDERSTANDING THE GROSS RENT MULTIPLER
The Gross Rent Multiplier (GRM) is one commonly used, and easy to understand metric to value small residential income properties, typically 2 to 4 units. The GRM is simply a ratio between the unadjusted sale price and annual income (Sale price divided by annual income).
For example, assume a 4 unit building with 1 bedroom apartments that rent for $650 per month sells for $350,000. To calculate the GRM, simply divide the sale price by the annualized rents ($350,000 / ($650 x 4 units x 12 months)) = 11.22.
Once you have enough data from the market, you will see patterns develop.
The average GRM from August 2014 to August 2015 was 10.79. The average GRM from September 2015 through July 2016 was 12.14, which indicates an accelerating market and supports the upward trend of GRMs indicated by the graph. It is also noted the GRMs in the early time periods of the graph tend to be closer to the trend line, while the more recent transactions are more widely dispersed from the trend line. This wider dispersion may reflect greater volatility in the market as investors compete and push up prices, as well as lesser quality properties with lower rents coming to market.
In conclusion, the Gross Rent Multiplier is a widely used and easily understood valuation metric typically used for small residential income properties. The simplicity of the multiplier does include some drawbacks, as it does not take into account any vacancy or operating expenses. However, this is usually not a problem as most small apartments sell fully rented and require the tenant to pay their own utilities, with the exception sewer and trash removal.
If you’re an owner thinking of placing your small rental property on the market, using a Gross Rent Multiplier (GRM) of 10 to 12, against your gross annual income, may give you a generally well supported idea what your property is worth.
If you’re an investor, the information presented above should give you some guidance on how the market is valuing income streams. If you’re considering a buying property with a GRM in the mid to high teens (13 to 18), you are paying dearly for that income, and absent some event such as renovating and repositioning the property to achieve higher rents, may suffer inferior overall financial performance. On the other hand, by acquiring a property with a GRM below 10 your investment should outperform the average.
For more information on investing and managing small residential investment properties, contact Paige Hubbard, ARM, at email@example.com.