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Formula – Gross Rent Multiplier (GRM)
G = P/R
Where:
G = Gross rent multiplier (GRM)
P = Sale price
R = Rent per period
Together with the salse comparison and cost approach, GRM is one of the 3 most popular method of property valuation that investors use to estimate the underlying value of property.
However, calculating GRM is the most tedious and extensive.
Meaning all the more you should do it. 😀
When you have got to the stage where you are using GRM, you know that you are no longer an average investor.
The sale price variable has to be researched and obtained from market data of recent transactions of comparable property types.
This can be generated from subscription services that offer real estate market data or from agents that you have a good relationship with.
The rent per period will have to be worked out with economic rent ratios.
For example, let say we have got the following figures after market research.
| Property | Sale Price |
Rent/mth |
GRM |
| 1 | $180,000 | $1,250 | 144.00 |
| 2 | $150,000 | $1,050 | 142.86 |
| 3 | $160,000 | $1,150 | 139.13 |
| 4 | $200,000 | $1,400 | 142.86 |
| 5 | $145,000 | $900 | 161.11 |
| 6 | $185,000 | $1,250 | 148.00 |
| 7 | $190,000 | $1,275 | 149.02 |
From the table above, the average GRM will work out to be 146.71.
It must be noted that the house with the highest price don’t have the highest GRM.
This is a good reflection of the real estate in reality. The best homes don’t always generate the best returns.
The appraiser conducting the appraisal will then have to do a judgment call and decide on which GRM factor to use for calculating property value.
Should the average of 146.71 be used and the economic rent per unit is $1,125, then the property would be valued at:
$1,125 x 146.71 = $165,048.75
The rental period can be replaced by what the user deems appropriate. But even if annual or quarterly rent is used for the calculation, the result will have little variance.
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