Calculating and Using the Gross Rent Multiplier (GRM)

Auckland Housing
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As an agent working with real estate investors, you will likely be doing quite a few market value analysis calculations for each property purchased. The Gross Rental Multiplier (GRM) is easily calculated in five minutes but isn't a very precise tool for getting to a true value. However, it is an excellent first quick value assessment tool to see if further, and more detailed analysis is worthwhile. If the GRM is too high or low compared to recent comparable sold properties, it probably indicates a problem with the property or gross over-pricing.

Investors actively seeking properties often have several on their radar. They need to find a way to quickly rank opportunities so they can spend their time in deeper analysis on the best opportunities first. 

The Gross Rent Multiplier hopefully focuses their deeper research into the best properties under consideration. As stated already, it isn't a really precise number, so you shouldn't rely on it so much that you don't check other properties with better GRMs.  

Methodology

Acquire the GRM for recently sold properties: Market Value / Annual Gross Income = Gross Rent Multiplier (GRM) - A property sold for $750,000 / $110,000 Annual Income = GRM of 6.82

Use GRM to estimate the property value: Let's say that you did an analysis of recent comparable sold properties and found that, like the one above, their GRM's averaged around 6.75. Now you want to approximate the value of the property being considered for purchase. You know that its gross rental income is $68,000 annually.

  • GRM (6.75) x Annual Income ($68k) = Market Value ($459k)
  • If the sale is listed at $695,000, you may not want to waste more time considering the purchase.

Commercial rental income properties are evaluated based on a number of ratios and lender criteria, and that's because they consider the income and profitability of the property as one of the, if not the, most important lending qualification criteria.

They rarely look at or care about the owners' personal credit histories. They may care about their assets if they aren't qualified by other factors. They could use other assets to guarantee the loan above the property itself.

Commercial lending has its own different qualification criteria, but the overall goal is the same. The lender wants the business, and they want to loan money. Mortgages for commercial property have different qualification criteria and process, but they are, from a big picture perspective, the same as any residential or other mortgages.

More About Real Estate Mortgages

Mortgage types used by real estate investors are usually the same as used by any purchaser of real estate. However, there are some more creative financing options available.

In certain situations, blanket real estate mortgages can be a viable financing tool. When the right conditions are present multiple owned properties can be financed with a blanket real estate mortgage. Once a real estate buyer understands the disadvantages of a blanket real estate mortgage, there are a number of reasons why it may still be an excellent choice.

Finding the best loan for you involves comparing loans such as conventional, jumbo, FHA / VA, as well as weighing mortgage benefits among fixed-rate, adjustable-rate and other mortgage alternatives. Interest only investor mortgage loans allow a real estate investor to defer principal payments.

This could be to avoid early negative cash flow, to flip the property, or to provide time to adjust rents upward to increase cash flow for regular principal and interest payments. Investors have a great many alternatives in property financing strategies and often the choice can make or break an investment.