How to Use the Gross Rent Multiple to Analyze Real Estate
Have you ever wondered if there was a super quick way to evaluate a property you want to invest in?
Well there is..
You should always do thorough due diligence but if you need a quick method for screening a property that you want to be a rental in your investment portfolio, then use this quick formula:
The Gross Rent Multiplier
Gross Rent Multiplier (GRM) – comparing the cost of the property to the annual gross revenue collected from rent.
Divide the Property Cost by the Gross Annual Rent
You’ll get a multiple, or in other words how many times larger the cost of the property is than the gross rent it will collect in one year.
An Example Calculation:
You’ve found a property you can purchase for $50,000 that you estimate will produce $500 monthly rent checks for an annual gross rent of $6,000 ($500 x 12 months).
Cost of Property/Annual Gross Rent
- $50,000/$6,000 = 8.33 GRM
What is a Good Gross Rent Multiple?
Good thing you asked. Typically, you want to shoot for a GRM between 4 to 7.
So in this example the lower limit would be 4 x $6,000 giving you a goal purchase price of $24,000 and on the upper end, 10 x $6,000 would equal a $60,000 purchase price target.
Think of it rationally, you want to get as much rent as you can for the least cost.
But you also have to take into consideration repairs and the age of different features of the house that could lead to future headaches and costs.
Just because you buy a cheap house that can rent for X amount in your head doesn’t mean you’ll be better off long term than someone who buys a more expensive property that also rents for the same amount.
They may deal with less repairs and have fewer unexpected emergencies that clean out the maintenance & reserve fund.
That’s why I’d recommend the Net Rent Multiplier.
Avoid the extremes:
- Overpaying for a property
- Buying too cheap of a property and failing to account for all the extra costs associated with such a purchase low price.
Research is everything when it comes to being a successful real estate investor. Become a master investigator and learn how to ask the right questions to the right people to ensure you know what you’re buying.
Read More Articles:
- How to Get Started in Real Estate
- How to Analyze a Fix & Flip
- The BRRR Strategy for Rental Property Growth
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