How to Use the Gross Rent Multiplier (GRM)
As a real estate agent working with real estate investors, you will likely be doing quite a few market value analysis calculations for each property finally purchased. The Gross Rental Multiplier (GRM) is easy to calculate 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, more detailed analysis is worthwhile. In other words, if the GRM is way out too high or far too low compared to recent comparable sold properties, it probably indicates a problem with the property or gross over-pricing.
Real estate investors who are actively seeking properties often have several r even dozens on their radar. They need to find a way to quickly rank the opportunities so that they can spend their time in deeper analysis on the best opportunities first.
Using the Gross Rent Multiplier allows them to get into deeper research on the best properties under consideration ... maybe. 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.
- Difficulty: Easy
- Time Required: 5 Minutes
- Getting the GRM for recently sold properties:
Market Value / Annual Gross Income = Gross Rent Multiplier (GRM)
Property sold for $750,000 / $110,000 Annual Income = GRM of 6.82
- Estimating value of property based on GRM:
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 X Annual Income = Market Value
6.75 X $68,000 = $459,000
If it's listed for sale at $695,000, you might not want to waste more time in looking at it for purchase.
Commercial rental income properties are evaluated based on a number of ratios and lender criteria. 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 very different qualification criteria, but the overall goal is the same. The lender wants the business. They want to loan money, as it's their business. Mortgages for commercial property have different qualification criteria and process, but they are from the big picture perspective, the same as any residential or other mortgage.
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 mortgage financing options available. The link will take you to explanations of these options.
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.
Locating 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. Often the choice can make or break an investment.