Gross rent multiplier
Also called GRM, Gross income multiplier.
The gross rent multiplier is the purchase price divided by annual gross rent. It is a screening ratio, useful because it needs no expense data at all, and unreliable for exactly the same reason.
How it works
It survives because of what it does not require. On a first pass through a list of properties you often have a price and an asking rent and nothing else, and the multiplier ranks them in seconds. It is the standard shorthand in small residential and in markets where operating statements are not routinely produced or not routinely believed.
What it cannot see is the entire expense side, which is where properties differ most. A building where tenants pay their own utilities and one where the landlord pays them can show the same rent at the same price with fifteen points of difference in expense ratio. It also cannot see capital condition, the tax bill after a sale reassesses the property, or the lease structure sitting behind the rent.
The denominator is not standardized either. Gross potential rent, in-place rent, effective gross income and total collections all appear in published multipliers, and the same property can be quoted at 11.5 or 11.8 depending on which was used. The multiplier is only comparable inside a group of properties whose income has been stated the same way. Use it as a filter, then compute a cap rate on whatever survives.
Formula
Gross rent multiplier = price / annual gross rent- State which rent is in the denominator: gross potential, in-place, or effective gross income
- The implied gross yield is 1 divided by the multiplier
- A monthly variant exists in small residential, where the denominator is monthly rent and the figure runs about twelve times the annual one
Worked example
Illustrative. Two properties, each at $10,000,000 with $1,000,000 of gross potential rent and 5 percent vacancy, so both show a gross rent multiplier of 10.0.
| Effective gross income, both | $950,000 |
|---|---|
| Property A operating expense ratio | 35% |
| Property A net operating income | $617,500 |
| Property B operating expense ratio | 48% |
| Property B net operating income | $494,000 |
| Cap rates of 6.18% and 4.94% | the same multiplier, $2.0 million apart |
Priced to Property A's 6.18 percent cap rate, Property B is worth $7,993,528 rather than $10,000,000. The multiplier ranked the two identically because it never looked at the thirteen point difference in expense load.
Conventions worth knowing
- Use it to sort a list, never to price a deal. Anything that survives the filter gets a cap rate computed on a normalized NOI.
- The sample property, at $55,900,000 over $4,870,800 of in-place gross potential rent, is an 11.48 multiplier. Its 5.40 percent cap rate is the number that actually priced it.
The common mistake
Comparing multipliers across lease structures
A net-leased building where the tenant pays taxes, insurance and maintenance keeps far more of its gross rent than a gross-leased one, so it deserves a higher multiplier on identical rent. Ranking the two side by side makes the net-leased asset look expensive and the gross-leased one look cheap, which is backwards. The comparison only holds inside a set of properties sharing a lease structure, a utility arrangement and a rent convention, and any deal that comes with an operating statement deserves the cap rate instead.
Related terms
- Cap rateA cap rate is a property's net operating income divided by its value or price, expressed as a percentage. It is the unlevered first-year yield on the purchase price and the standard shorthand for what a market is paying for a stream of property income.
- Operating expense ratioThe operating expense ratio is total operating expenses divided by effective gross income. It is a fast sanity check on whether an expense budget is plausible for the asset type, the market and the way the property is run.
- Gross potential rentGross potential rent is the rent a property would collect if every unit were occupied for all twelve months at full rent, with no vacancy, no concessions and no delinquency. It is the top line of the pro forma, and everything below it is a deduction.
- Effective gross incomeEffective gross income is all the revenue a property is expected to collect in a year: gross potential rent, less vacancy, loss to lease, concessions and bad debt, plus other income. It is the revenue figure operating expenses are subtracted from to reach net operating income.
- Price per unit and price per square footPrice per unit is the purchase price divided by the number of units; price per square foot divides it by rentable area instead. Both are comparison shorthand rather than valuation methods, and they disagree with each other whenever unit sizes differ.
Keep reading
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.