Updated · Part of the CRE investment glossary
How the gross rent multiplier works
GRM answers a rough question fast: how many years of scheduled rent does the price represent? All it needs is a price and a rent roll, so investors use it to sort many listings before they have operating statements, and appraisers use it as a cross-check on small residential income properties.
Its speed comes from what it leaves out. Gross rent is before vacancy, credit loss and every operating expense, so GRM treats a building that is cheap to run the same as one that is expensive. Two properties with the same GRM can earn very different net operating income.
The formula
GRM solves both ways:
GRM = price ÷ gross annual rent Price = GRM × gross annual rent Gross rent yield = gross annual rent ÷ price = 1 ÷ GRM
- Price: the sale price or the value being tested.
- Gross annual rent: scheduled rent for twelve months at current leases, before vacancy and expenses. Some markets quote GRM on monthly rent, which makes it twelve times larger — use the convention of your comparables.
Worked example: pricing from comparable sales
A building is offered at $10,000,000 with $1,200,000 of gross annual rent: a GRM of $10,000,000 ÷ $1,200,000 = 8.33. Three similar buildings nearby sold at GRMs of 7.80, 8.00 and 8.20. At the middle figure of 8, the same rent implies 8 × $1,200,000 = $9,600,000 — $400,000 below the asking price.
| Property | Price | Gross annual rent | GRM |
|---|---|---|---|
| Sale 1 | $7,020,000 | $900,000 | 7.80 |
| Sale 2 | $12,000,000 | $1,500,000 | 8.00 |
| Sale 3 | $8,610,000 | $1,050,000 | 8.20 |
| Subject at asking price | $10,000,000 | $1,200,000 | 8.33 |
| Subject at a GRM of 8 | 8 × $1,200,000 = $9,600,000 | $1,200,000 | 8.00 |
GRM vs cap rate
A cap rate divides NOI — income after vacancy and operating expenses — by price. Take two buildings at $10,000,000 with the same $1,200,000 of rent, 5% vacancy and $30,000 of other income, so both have $1,170,000 of effective gross income and a GRM of 8.33. Building A spends $520,000 to operate and earns $650,000 of NOI, a 6.50% cap rate. Building B pays its own utilities and spends $640,000, earning $530,000 of NOI, a 5.30% cap rate.
The GRM says they are the same deal; the cap rate shows Building B is $120,000 a year worse. That is why GRM is a screen and NOI is the underwriting.
Common mistakes
GRM goes wrong when it is stretched past a screen:
- Mixing monthly and annual GRMs between a listing and its comparables.
- Comparing properties where the owner pays utilities in one and tenants pay in the other.
- Using asking rents or pro forma rent for the subject and in-place rent for the comparables.
- Pricing a property on GRM alone without checking NOI, the T-12 and a cap rate.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.