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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.
Why?
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.
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While talking about rent increases in tough economic times might be like pining for summer in the midst of a Minnesota January, it is nevertheless important to remember the enormous impact on value that even the slightest increase in revenue can make.
There is no greater illustration than this than the gross rent multiplier
. As I explained a while back, this figure is simply the price or value of the house, divided by the amount of money it takes in annually.
How do rent increases, or, for that matter, even more laundry revenue, impact the GRM?
Let’s pretend, on average, duplexes in your area are selling at an average GRM of 10.
Your duplex grosses $10,000 per year in rent and laundry income. Therefore, your property is most likely worth $10,000 x 10 GRM = $100,000. (Bear in mind that condition and location always contribute to value as well.)
The economy is bad, so you feel you can’t increase rent. But what would happen if you simply upped it by $10/month for each unit. That would result in an additional $20/month in income, for $220 per year.
What if you could generate $10 more a month in laundry income by increasing the charge for each was by 25 cents? This would result in $110 more for the year.
Combined, you would have increased your annual income by $330.
It doesn’t seem like much, I know. Until, of course, you use it to determine the market value of your property. Multiply the $330 by the GRM of 10 and those minor increases suddenly translate into your property increasing in value by $3300.
Times are tough for everyone, but there are still fair, compassionate ways to increase your bottom line.
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Every day anywhere from 10 to 20 duplexes either are newly listed on the Twin Cities MLS, or have their asking prices reduced.
How can you tell which ones are good investments?
I suppose you could stop and do the math on each of them. Of course, that would take a lot of time.
Is there a shortcut?
Over time, seasoned real estate investors and Realtors use to learn two tools to quickly assess whether or not a property is likely to be a good investment: the gross rent multiplier and something called a cap rate.
While the cap rate is a useful tool for larger commercial properties, I haven’t found it to be as effective a measure on smaller multi-family units. Nonetheless, I’ll discuss the cap rate later in the week.
The gross rent multiplier is a very simple math problem. To arrive at it, just take the asking price for a property and divide it by the amount of rent a building generates annually.
For instance, if a duplex is priced at $240,000, and the MLS indicates it is receiving $24,000 in rent for the year, 240,000/24,000 = 10. The gross rent multiplier is 10.
How do you use this number?
Generally speaking, the lower the gross rent multiplier number is, the more likely the duplex is to cash flow.
So if a property has a low GRM, do I recommend a client buy it?
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