How to Calculate Gross Rent Multiplier?
A fairly simple and quick method of estimating potential investment property based on rental income is to calculate the gross rent multiplier. This indicator makes it possible to estimate how many years it takes for the gross rent of real estate to pay off.
At the same time, it makes it possible to understand whether real estate rental will be profitable or unprofitable when market conditions change. It can be calculated quickly in your head, but if you want a more accurate and reliable calculation, you can use our gross rent multiplier calculator.
What is gross rent multiplier?
The gross rent multiplier calculator helps to define the ratio for the market value of a property to its gross annual rental income. This calculation does not include ordinary operating expenses and debt services. Using the gross rent multiplier method is a simple way of analyzing the value of leased property using a revenue based approach.
It provides an opportunity to immediately understand whether the selected property will be profitable and whether to conduct a further in-depth analysis for the value of the property.
How to calculate gross rent multiplier?
The gross rent multiplier formula is formulated as follows:
Gross Rent Multiplier (GRM) = Property Purchase Price / Gross Annual Rental Income
Dividing the price of real estate by the gross annual rental income, you will calculate the gross rent multiplier. This calculation will include not only rent, but also other sources of income such as reimbursement of utility bills, parking and any other income.
How to create a gross rent multiplier rating scale?
By investing in real estate for rent, you get an income-generating investment. Depending on the age of the property and the potential for increasing its maintenance costs, properties with different gross rent multiplier levels could be either a better or worse option for investment. Brand new real estate at first glance may seem the more expensive route. However, it will not require a lot of maintenance work, which in turn allows you to earn more money.
Here’s why it’s helpful to develop a gross rent multiplier rating scale for your market like this:
- Low GRM = old real estate with delayed maintenance or in need of major repairs, such as roof replacement or new heating and cooling system.
- Average GRM = real estate built in the last 10 or 20 years that needs renovation, such as energy-saving windows, replacement of appliances or exterior painting.
- Higher average GRM = property built in the last 10 years, which requires only regular maintenance to maintain the value of the property and keep the rent at the market level.
- High GRM = new real estate with lower costs for regular maintenance with new equipment and state-of-the-art electrical, plumbing systems.
Such a gross rent multiplier rating scale will help to improve risk assessment between the age of the property and its potential to increase maintenance costs by calculating the gross rent multiplier.