said on March 29th, 2010 categorized under: Multi-Family Property Investing
On real estate blogs across the nation new investors ask for guidance as to what is a “good” gross rent multiplier (GRM) on multi family property.
Remember, to determine a duplex’s gross rent multiplier, divide the purchase price of the property and by the gross amount of rent the property generates annually. So, if a building is listed at $200,000 and grosses $20,000 a year in rent, then $200,000/20,000 = 10. The GRM on the property is 10.
So is 10 a “good” number?
I wish there was a broad, all encompassing answer. But there isn’t.
There are a couple of reasons.
First, all real estate is local. A “good” gross rent multiplier in Beverly Hills, Calif., is likely one at which a duplex doesn’t come anywhere near breaking even in terms of the revenue it generates. However, a gross rent multipler of say, 18, may in fact be “good” because most duplexes in the market are selling at a GRM of 24.
The second reason there isn’t a sweeping general answer for the nation as to the definition of a “good” gross rent multiplier is GRM’s fail to take into account expenses.
They are, nonetheless, effected by things like who pays the heat, how much the property taxes are, where the building is located, and so on.
When I first obtained my real estate license, I did hundreds if not thousands of income property analysis spreadsheets for MLS properties. By doing so, I quickly realized there were consistent numbers at which properties cash flowed. And that number differed between properties where the landlord paid the heat and those where the tenants did.
Those figures worked pretty consistantly for years. And then the seven metro area counties caught up in what they perceived the taxable market values of Twin Cities area duplexes to be.
As a result, property taxes increased and with them, so too did gross annual expenses.
The result? The Minneapolis and St Paul definitions of the gross rent multiplier at which a duplex will cash flow changed.
In fact, the gross rent multiplier numbers I use to eyeball whether or not a property will break even or cash flow dropped in each of the heat-paying categories by two.
What are those numbers?
Call me. We’ll talk.