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Gross Rent Multiplier

Gross Rent Multiplier for Apartment / Multifamily Loans

 

Using a Gross Rent Multiplier to estimate the value of your investment property in this market will only take a few minutes. Gross Rent Multiplier (GRM) by no means is as accurate as an appraisal but with no cost or time involved will help you compare the value of properties for sale that you are interested in quickly. GRM gives you an indication of value based on the rents the property has achieved. Thus, properties with higher rents will achieve a lower or better GRM in relationship to the sales price. The lower the GRM, the higher the cash flow based on the sales price and the better your investment. GRM also reflects the number of years it will take you to pay off the property using just the gross rents. To calculate GRM, take the purchase price and divide it by the gross annual rents with the property being 100% occupied.  

 

For example:  The purchase price is $1,000,000.  The annual gross rents are $120,000.  The GRM is 8.33. 

Purchase Price/Gross Rents = GRM

 

How to use GRM to check the value of a rental property

When you are searching for an “A” quality property 1 – 10 years old in this market for sale a reasonable GRM would be a 12 which is multiplied by the annual gross rents and this will give you a reasonable purchase price. Very high rent properties will be a 14 GRM.  If the property is 10 to 20 years old and has some deferred maintenance it will be a “B” property and a will have a 10 to 12 GRM.  For a “C” property that is over 25 years old in fair condition use an 8 10 CRM.

For example:  8 CRM X  $73,440 (annual Income) = $587,520 (Market Value)

 

How accurate is a value calculated by Gross Rent Multiplier?

This is a fair indication of value not an excellent one.  As mentioned, in this market, an “A” quality newer apartment complex in very good condition will have a much higher GRM than a 30 year old “C” quality property in fair condition. The lower the CRM, the higher return you are getting on your investment – but you will likely have to choose an older property with more deferred maintenance for it to have a lower CRM. 

 

Using Gross Rent Multiplier to determine value does not take into consideration vacancy or annual operating expenses. Another draw back is that it does not look at how well a property is managed or if it has higher or lower expenses than average for a property of its age and condition. A commercial property appraisal is the most accurate indication of value but can take 3 – 4 weeks and a great deal of money. This type of appraisal averages many comparable properties together to come up with a valuation based on sales comparables (Sales Comparison Approach) and Net Operating Income (Income Approach).

 

How to Determine GRM Accurately

Get a copy of the current rent roll for the subject property.  For any vacancies put in the rent that the units should receive. 
Take the monthly gross rents X 12 to get the annual gross rents
Divide the purchase price by the gross annual rents

 

Purchase Price/gross annual rents = GRM

 

Now do the same process with other properties that have sold or are for sale in this market. You can compare the GRM of those properties with the properties you are interested in. 

 

To find many commercial properties for sale you can go to: loopnet.com

 

To find the sales price and other info on properties that have sold go to: zillow.com

 

Or ask you real estate professional for comparable sales.

 

At Apartment Loan Store, we would be pleased to give you our opinion of the value of a property you are interested in purchasing and also pre-approve you for a loan. Call one of our friendly loan specialists at 503-376-7303