There are many factors to consider when buying real estate. Instead of discussing all the metrics at once, I have decided to start with Gross Rent Multiplier (GRM). According to investopedia, “A GRM values a rental property based on the amount of rent an investor can collect each year. It is a quick and easy way to measure whether a property is worth the investment”.
In order to calculate the GRM, you need to know what the asking price is of the real estate; as well as, the scheduled rental income of that asset. Once you have these two variables, you divide the asking price by the annual rental income. The calculation will spit out a number that represents the number of years it will take for the current gross income to equal or recoup the purchase price.
Now that you know how to calculate the gross rent multiplier, you can quickly evaluate and compare one property’s GRM to another – indicating the return on the assets. This will help you determine if a property is a worthwhile investment. It is important to note that the GRM varies across product type and location – for example: the GRM for apartments in South Los Angeles is approximately 12 whereas the GRM for apartments in Koreatown/Echo Park may be closer to 15.
The reason why so many investors prefer to use the gross rent multiplier as an underwriting tool is that it cannot be tweaked/misconstrued! The rents cannot be fudged (in most cases) and will be revealed during inspection or due diligence period. If the rental income statements and/or estoppels are obtained during due diligence period there is rarely a scenario in which an investor is hoodwinked.
All in all, KingSide Investment Group knows how much importance clients put into different metrics when evaluating investment properties – more specifically gross rent multiplier. While all investments come with some level of risk, GRM works as an assessment tool to help minimize that risk for our investors.
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