Gross rent multiplier (GRM): a quick way to compare rental prices

The formula

GRM = price ÷ gross annual rent

Gross annual rent is the scheduled rent for a full year, before vacancy and before any expenses. A house priced at $360,000 that rents for $3,000 a month ($36,000 a year) has a GRM of 10. A lower GRM means you pay less for each dollar of rent.

Some people use monthly rent instead, which makes the number 12 times larger: the same house has a monthly GRM of 120. Both are fine as long as you don't mix them. The YieldBadger calculator uses annual rent.

Estimating value from comparable sales

GRM is most useful for a fast valuation when you know what similar rentals sold for. Suppose three comparable small rentals in the same neighborhood sold recently:

The property you're considering brings in $34,800 a year ($2,900 a month). At the neighborhood's GRM of about 9.6, that rent supports a price around $335,000. If it's listed at $375,000, it's priced like a GRM of 10.8: you'd be paying more per dollar of rent than recent buyers did, and you'd want a reason.

The weakness: GRM ignores expenses

Two properties with the same price and rent have the same GRM, even when one costs far more to run. Imagine two fourplexes, each $600,000 with $60,000 of yearly rent: both have a GRM of 10. In the first, tenants pay their own utilities. In the second, the owner pays water, sewer, trash and gas heat for all four units, around $9,600 a year, and its property tax bill is $3,000 higher. The second building's NOI is $12,600 a year lower, so its cap rate is about 2 percentage points lower. GRM sees no difference at all.

That's why GRM works best for screening and for comparing very similar properties in the same area, and why the cap rate, which subtracts expenses, is the better measure once you have real numbers. The cap rate & GRM calculator shows both side by side.

GRM and the 1% rule

The 1% rule is GRM in disguise. Rent of 1% of the price per month is 12% of the price per year, a GRM of about 8.3 (or a monthly GRM of 100). If you've heard someone say a market is “a 1% market,” they mean GRMs there are around 8 or lower.

Common mistakes

• Mixing annual and monthly GRM, which produces numbers 12 times apart.
• Comparing across areas or property types. A GRM of 14 may be normal in one city and expensive in another.
• Using asking prices or pro forma rents. GRMs from comps should use actual sale prices and actual rents at the time of sale.
• Stopping at GRM. Use it to decide which properties deserve a closer look, then estimate expenses.