Gross rent multiplier calculator
Price ÷ annual rent, or the value a market multiplier implies.
The numbers are examples. The expense share is only used to show the implied cap rate; the GRM itself does not use it.
What is the gross rent multiplier?
The gross rent multiplier (GRM) is the price of a rental property divided by its gross annual rent, before any expenses. California's Board of Equalization, in Property Tax Rule 8, allows income to be capitalized with gross income or gross rent multipliers derived by comparing the sales prices of closely comparable properties with their gross incomes or rents. In the example, a $400,000 property that rents for $2,800 a month has gross rent of $33,600 a year, so GRM = $400,000 ÷ $33,600 = 11.90. A lower multiplier means you pay fewer dollars of price for each dollar of rent.
How do I estimate a property's value with a GRM?
Turn the formula around: value = gross annual rent × market GRM. The market GRM should come from recent sales of similar rental properties in the same area, each divided by its own gross rent, which is the method Rule 8 describes. With the example rent of $33,600 a year and a market GRM of 12, the indicated value is $403,200. A GRM taken from a different neighbourhood, building type or era says little, and a multiplier built from asking prices instead of sales prices overstates value.
What are the 1% and 2% rules?
Investors use two rules of thumb: a property is worth a closer look if its monthly rent is at least 1% of the price, and a very strong deal if it reaches 2%. We could not find an official or published source for either, and no appraisal standard we found uses them, so treat them as screening shortcuts, not tests. In GRM terms, 1% a month is a multiplier of about 8.33 (a $280,000 price on $2,800 rent gives 8.33 and 1.00%), and 2% is about 4.17 ($140,000 on $2,800 gives 4.17). Whether a rent-to-price ratio is good depends on property tax, insurance, repairs and vacancy in your market, none of which the ratio contains.
How is GRM different from the cap rate?
The cap rate divides net operating income by price, after operating expenses; the GRM divides price by gross rent, before them. If expenses are a share e of rent, then the cap rate is (1 − e) ÷ GRM; this is our own derivation, not a published formula, and it ignores vacancy. At a GRM of 11.90, expenses at 30% of rent give a cap rate of 5.88%, at 40% 5.04% and at 50% 4.20%. Two properties with the same GRM can have very different cap rates if one has high property tax or old systems, which is why the cap rate calculator and rental property calculator come after a GRM screen, not before it.
Worked example: screening two rentals
Property A sells for $400,000 and rents for $2,800 a month: GRM 11.90, with monthly rent at 0.70% of the price. Property B sells for $280,000 and rents for the same $2,800: GRM 8.33 and 1.00% a month. On gross rent alone B looks far cheaper per dollar of rent. But if B sits in a county with much higher property tax and needs a new roof, its net income could be lower than A's. That is the point of the multiplier: it narrows a list of properties quickly, and the cap rate or a full cash-flow analysis then decides. Do not compare GRMs from different markets as if they measured the same thing.
What is a good GRM?
There is no universal number. A GRM that is good in one city is poor in another because prices, rents, property tax and rent rules differ. The useful comparison is with recent sales of similar properties near the one you are looking at. Check, too, whether a quoted GRM uses annual rent, as here, or monthly rent: dividing by monthly rent gives a number 12 times larger; make sure you compare like with like.
What are the limits of the GRM method?
The GRM ignores everything between gross rent and what you keep. It does not see vacancy, operating expenses, property tax, the condition of the building, or whether the tenant or the owner pays utilities, so two buildings with the same multiplier can earn very different net income. It also assumes the current rent is the market rent; a property let far below market, or under a rent cap, is not comparable with one at market rent. And it needs good comparables: with only two or three sales, one unusual deal can distort the multiplier. For these reasons we suggest treating the GRM as a quick cross-check, not a valuation.
Estimates for planning only — not financial, tax, appraisal or legal advice. An appraiser or your lender decides value. Sources: California State Board of Equalization, Property Tax Rule 8, “The Income Approach to Value” (18 CCR §8), subdivision (h). The 1% and 2% rules have no source we could find. See also the rental property calculator, cap rate calculator, DSCR calculator and mortgage calculator. How we check our calculators.