GROSS RENT MULTIPLIER AND CAP R LIER AND CAP RATE
Gross Rent Multiplier (GRM) and capitalization rate value (also known as cap rate ) are the two main ways to value properties. The GRM uses a property’s gross income and involves ratioing that with the property’s price. Ultimately, this method helps you determine how long it will take for a property to pay for itself. To figure out the GRM, you simply divide either the fair market value or asking price by the likely annual gross income from rent. The number you get from this formula is how many years it will take for the rent to pay off the property; obviously, the lower the number, the better. The ideal length of time is between four and seven years. GRM: fair market value OR asking price / gross annual income = time to pay off property with rental income Of course, it’s not actually this simple. This formula neglects all the other costs that could come up, including general maintenance as well as both expected and unexpected repairs. So why use GRM? Ultimately, it’s most helpful when you’re trying to decide on which property to buy. You can look at the GRM across all the properties you’re looking at (as well as others in the market). The cap rate differs from the GRM because it looks at Net Operating Income (NOI) in relation to the current market value. It looks at general operational expenses and vacancy rates, meaning it’s a more accurate way to see if a rental property is
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