If you are interested in the commercial real estate rental market, then you have probably come across gross rent multipliers before. However, applying these abstract statistics in the real world is something of a challenge.
Generally speaking, the ideal range for a GRM is between 4 and 12. Of course, that depends on the market, your goals and various other factors.
What is GRM?
As explained on O’Reilly, gross rent multiplier is the number by which you must multiply gross annual income to arrive at the fair market value for your property. Gross income multiplied by GRM equals FMV: The reasons why the range of 4-12 is usually safer all proceed logically from this formula.
Is lower GRM better?
Lower GRM scores between comparable properties often represent better deals. One of the obvious reasons you generally want a lower number: More income for the price is generally better. For example, a million-dollar property that has a GRM of 4 would gross $250,000 a year, whereas one with a GRM of 10 would make $100,000.
Remember that GRM has a basis in gross income — not net income or profit. Therefore, lower operating costs, more stability or better residency patterns often counterbalance a higher GRM in terms of the viability of an investment.
Why between 4 and 12?
Below a rating of four, you tend to see many more properties in serious distress. This score might indicate extremely high operating costs, local rental market problems, maintenance issues or other challenges to project profitability.
On the other side of the range, you are likely to see overvalued properties or markets. Gross annual income of under 1/12 of market value, i.e. a GRM of 12 or above, is only acceptable under a limited number of circumstances.
Does GRM matter?
Please put these numbers in as much context as possible. Specifically, look for comparable properties and use or determine their GRM for your calculations. If that is impossible, then please remember the reason why 4-12 is the safer zone for this metric. Do not just memorize the numbers themselves, or you might miss opportunities.