As of 2010, 33 percent of households in the United States were occupied by renters, according to Census Bureau data gathered by the National Multi Housing Council. These renters rent their homes from individual homeowners, who own more than one property; from companies that own apartment buildings, condominiums or other types of residential properties; or from real estate companies that act as an intermediary between the homeowner and the renter. A common calculation used by apartment building owners and other real estate professionals is the gross rent multiplier, or GRM. This calculation assists building- and homeowners in property valuation and location assessment.
Sale, Asking or Market Price
Every property has an assigned value. Building owners, real estate companies and individual homeowners are aware of the values of their property as values are listed in insurance documents, appraisal documents or in publications that list the market values of properties. If the property owner decides to have an appraiser conduct a new appraisal on the property, the most recent appraisal is the most significant value. Bankrate reports that an appraiser has the final say on property valuation. The owner can, however, set the asking price above that value.
Annual Rental Income
Annual rental income is the total rent collections for a calendar year. For an apartment building or condominium complex, this would include the rental collections from all the tenants in the building for the year. For a single home, this would include the individual tenant's total rent payments for the year. The owner does not deduct any rental expenses, such as repairs to the property, from the annual rental income.
The GRM is the quotient of the sale or asking price divided by the annual rental income. For instance, a homeowner has an asking price on his home of $200,000 or he is willing to rent the home to tenants for $1,200 per month. The gross rent multiplier in this case is [$200,000 / ($1,200*12)] = 13.9.
Low vs. High GRM
Gary W. Eldred, author of the book "The Beginner's Guide to Real Estate Investing" discusses the implications of a low and a high GRM. An extremely low GRM (around a 4 or 5) indicates rundown properties, undesirable neighborhoods and cities that are experiencing little or no growth. For a GRM to be low, the asking price of a home is generally low and the rent high in proportion to the price. For example, a home with a $48,000 asking price and $1,000 monthly rent payments calculates out to a GRM of 4. A high-gross rent multiplier indicates a professional neighborhood, a vacation town or an area where property values are high. In coastal California cities, gross rent multipliers can be as high as 25. A home with a GRM of 25 would have an asking price of $500,000 and rent payments of $1,666 per month. A high-gross rent multiplier (anything above 8) can lead to negative cash flows. To prevent negative cash flows, the owner can pay a high down payment or look for property where rent is proportionate to property value and selling prices.