How do you quickly find a ball park estimate of value of a rental property?
There are many different calculations that can be used to truly understand the potential of an income producing real estate investment, but how does the gross rent multiplier (GRM) help paint the picture?
Tune into this week's episode of Ask the Instructor at a Special 3pm time to learn more about calculating the gross rent multiplier!
If someday you wanted to be a real estate investor. You need to scout the market area that you want to invest in, knowing how Gross Rent Multiplier works will help you with setting up your business to an effective or even successful approach.
Today, we are going to focus on how you can utilize the income capitalization approach or understand the gross rent multiplier to easily understand how the rent price works in the specific area of the market that you wanted to invest in.
You can easily get the Gross Rent Multiplier by getting the result by dividing the Sale Price/Value Price of the property and Renting Price / month. To simply put, (Sale/Value Price / Monthly Rate)=GRM.
Take note that, the lower the GRM the better for your Real Estate Investment. Let me show you some examples. Between these sets from A-D:
SP= Sale/Value Price of the Property
GRM=Gross Rent Multiplier
- A. (SP:$100,000 / MR:$1000) = GRM: 100
- B. (SP:$120,000 / MR:$1200) = GRM: 100
- C. (SP:$90,000 / MR:$1200) = GRM: 75
- D. (SP:$130,000 / MR:$900) = GRM: 144
By taking a quick glance from the sets (A-D), you can easily see the lowest GRM. It means, the most ideal GRM that you wanted to get from those sets is SET C. Why does the lower the GRM mean better? That’s a good question, the reason behind that was, you have only that many(GRM #) months to go before you match your Sale Price. That means, you already got your sales investment back and the latter months will be your business profit already.
After getting a basic touch of calculating GRM from this sample, you can easily browse from MLS about the properties that are currently for sale or how much are the rental fees around the market area that you wanted to invest with. That way you can already calculate the average GRM around that area of the market and forecast your business, whether it will be good for your plan or not.