Why and How to Use a GRM Calculator When Considering an Investment Property
Written By: mcsherryproper on March 21, 2021Are you interested in running some numbers on a property that you think might be a good addition to your existing investments? Or perhaps you want to know if the new city you have been eyeing is a good place to start looking for properties for your real estate investing? The GRM or gross rental multiplier can provide you with an answer.
It’s not the most precise method, but it’s a good enough measure of a new property’s potential profitability. What makes the GRM an invaluable tool for investors is it’s very simple, and you can get ballpark figures immediately. Analyzing different cities can get messy if you don’t know how to simplify the approach.
The GRM provides the possibility of immediately discerning if a property (or city) is right for you as an investor. Of course, property management services or a full-service property management firm can further help you determine how to make any property you own more profitable in the short-term or the long-term.
What is the GRM?
The gross rent multiplier is essentially the relationship between the annual rental income and the value/price of a property you’ve been eyeing. GRM tells you (in general terms) how many years you will need to make money off of a property if you decide to rent it out.
The ‘downside’ of GRM, which isn’t a downside because it’s not meant to produce all the calculations related to running a property, doesn’t take into account property expenses, which can vary greatly across different cities, towns, and states.
There are also differences in property expenses across finer filters, such as across neighborhoods or villages in the same city or town. The type of property in question will also have its unique expenses, depending on what you have to maintain as the landlord.
Since there are few other methods to estimate the profitability of a property quickly, the GRM is used as a general metric by investors to determine if they are getting a good deal from a property or not. The GRM is similar to other quick assessment computations like the P/E ratio used to measure companies’ value. The lower the resulting GRM, the better. A lower GRM makes a property a more attractive investment, as the gross income that it generates is deemed as much higher than the current market valuation.
If an investor needs a more accurate multiplier to compare two properties, the NIM or the net income multiplier can be used instead. The NIM takes into consideration the operating expenses of both properties being compared.
How to Compute the GRM?
The GRM is simple to compute. Take the property price and divide this figure by the gross annual rental income associated with it. The formula is:
GRM = Price (of the property)/Gross annual rental income
If the property value is $200,000 and the gross annual rental income is $36,000, the GRM is 5.55.
As we have mentioned earlier, the GRM provides a ballpark figure for how long you have to wait for the property to pay for itself. However, a more accurate computation should consider property taxes, seasonal rental conditions, vacancy rates, insurance rates, and other rental and maintenance expenses.
Is the GRM Useful?
Yes, the GRM is certainly useful, and using a GRM calculator (you can find these all over the web) is a good idea. However, it’s not the most accurate of all computations, as it only gives you the general contour of what to expect in terms of how many years it will take for the new property to pay for itself. Realtors call this a ‘quick assessment.’ As you dig deeper into the new city or neighborhood’s financial aspects, you will be able to determine what you need to add to the more detailed analysis to arrive at a more accurate calculation. There are situations when the GRM is either too high or too low. If this is the situation, compare the GRM of similar real estate in the same area/city. Comparable real estate should give you a clue if a property is overpriced or not.
The GRM is very useful for investors looking for new properties to invest in but has several in mind in the same city or different cities. Whatever the circumstances, the GRM should help the investor determine if a property is worth investigating more or not. Think of the GRM as a basic litmus test for properties, so you can whittle down the properties that are most likely to provide a good return over a preferably shorter amount of time.
Using GRM in Specific Contexts
While the GRM is useful if computed for just one property, it can be used to determine if a property in an area is overpriced or not. You computed the GRM of seven properties in an area, and the average GRM is 6.75. If the annual rental income (average) is $65,000, these values will result in a market valuation of $438,750. With this marketing valuation, any property worth $650,000 would be out of the question already.
Lenders also consider the GRM in different cities. Of course, lenders want investors to make money from their investments, and the profitability of the property is probably the most important criterion. If the owner is not qualified, the lender might look at his assets as these assets may be used to guarantee any loan repayment. Different qualification criteria are depending on the type of lender and the size of the loan. The transaction’s overall goal remains the same across different scenarios – lenders want to make money, and they can only do so by loaning the money needed by the investor. In this respect, the mortgages of commercial properties and the mortgages associated with residential properties are the same.
