Pros & Cons of Using Gross Rent Multiplier to Evaluate Investment Properties

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Gross Rent Multiplier (GRM) is the ratio of the price of a real estate investment to its annual gross potential income. GRM can be thought of as the number of years it would take for a property to pay for itself in gross rent received. Therefore, a lower GRM is indicative of a better investment opportunity.

GRM = Price / Gross Potential Income

GRM is used to compare very similar properties within the same neighborhood or market area. As an investment ratio, it has its advantages and disadvantages. Here are the pros and cons of using gross rent multipliers to compare investments:

Pros

  1. Requires very little information
  2. Required information is easily and quickly obtainable
  3. Most similar properties should have similar GRMs (within homogenous neighborhoods/markets)
  4. Most investors are familiar with GRM or can grasp the concept quickly

Cons

  1. Does not account for appreciation or depreciation in future value
  2. Only measures gross potential income NOT net operating income
  3. Disregards vacancy and credit losses, operating expenses, and taxes
  4. Disregards the effects of financial leverage

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