Success in commercial real estate can be quite challenging without certain valuation tools that can help you decide which option will produce the best returns. A gross rent multiplier is one of these tools. It’s an important real estate valuation tool that helps you compare the income-producing rates of different rental properties on the market.
What Is a Typical Gross Rent Multiplier?
A typical gross rent multiplier (GRM) measures the ratio of a subject property’s price or your investment to the gross rental income that it earns. After calculating your GRM, a low value simply indicates how lucrative the venture would be. The lower the value, the more lucrative the investment.
Usually, a typical gross rent multiplier (GRM) depends on the property type and the market where your rental property is located. However, you should note that the gross rent multiplier will gradually decrease as the market price of the rental properties increases as a result of expanding market cycles.
A market recovering from recession sees a relatively low GRM as liquidity begins to flow again and investors resume acquiring properties, these circumstances may see high single-digit GRMs. GRM would also likely go up further, possibly into the teens, as investment cash keeps flowing from equity lenders and investors, resulting in value overtaking rent.
Why Use the Gross Rent Multiplier?
Having an idea of the GRM of a particular property could help determine if the rental property you are about to acquire would bring significant returns. When you have different rental properties to choose from, using the GRM would help you determine which one best suits your investment goals.
Also, this financial tool is easy and simple to use, compared to other tools. It is less cumbersome and doesn’t require you to have special knowledge or skills. It makes use of only two variables and a simple formula.
How Do You Calculate Gross Rent Multiplier?
Calculating GRM is a pretty straightforward process and requires only knowledge of:
- Purchase price of the property at a fair market value
- The gross rental income
Now, the next step is simply to use the formula:
GRM= Purchase price/ gross rental income
A low GRM doesn’t necessarily imply that the commercial rental property is going to bring great returns. You have to consider the operating costs; the expenses you would incur from owning the rental property.
For example, owning a multi-family rental property and apartments means that you have to carry out routine maintenance, repairs and replacement. Putting these costs into consideration will help you better determine how lucrative the investment would be.
Practical Example
If you are looking to invest in some apartments and multi-family rental properties in Cincinnati, you might become overwhelmed and confused as to which one to go for. Say you are looking at two rental properties with the following description:
Property 1
This is a multi-family duplex with a price tag stating $300,000, and an annual gross rent of $43,200. Using the formula above, the GRM will be 6.94.
Property 2
This is an apartment with a price tag stating $250,000, and an annual gross rent of $21,000. Using the formula, the gross rent multiplier will be 11.94
Of these two properties, property 1 has the lower GRM, implying that it would be more profitable to invest in property 1. However, as stated above, this shouldn’t be the only criteria as it only makes decision making easy.
A great way to accurately determine profitability is to hire expert services like Si Vales Valeo Real Estate especially if you are looking to invest in the Northern Kentucky area. This leaves you less prone to mistakes in evaluation and errors in judgment.
Related Questions
Is Gross Rent Multiplier the Same as Cap Rate?
No. A gross rent multiplier differs from cap rate in that, a cap rate income is the ratio of the purchase price of the property to the net operating income. Also, the parameters required are usually unavailable to investors who just want to compare commercial real estate values.
What Is the Difference Between Net Rent and Gross Rent?
The net rent sums up the total amount that was spent on maintenance, expenses, operating costs, and miscellaneous costs while the gross rent is the total amount received as rent annually.
Is It Compulsory to Use a Gross Rent Multiplier?
No. You can always use other measures to determine potential returns on investment property. However, the gross rent multiplier makes comparison and decision making easier. It is a fast way of cutting down options and evaluating the most favorable.
Conclusion
Expanding your portfolio and building sources of passive income is an excellent idea. If you would be venturing into commercial real estate, applying measures like the gross rent multiplier are necessary to avoid unprofitable ventures. Also, if you are stuck at any point, SVVRE expertise is readily available
