Gross Rent Multiplier

Another valuation rule of thumb is the gross rent multiplier (GRM). It asks the question: Gross income times what number equals fair market value? In other words, if you divide fair market value by gross income, what is the resulting number? In formula form, the GRM looks like this:

images

Applying this formula to our model of the Diamond Medical Center, assuming the FMV equals $10,200,000, the result is a GRM of 7.08 or, to round it off, a 7-times factor. Inserting the figures in the formula the equation looks as follows:

images

Conversely, if you know that comparable properties are selling at a GRM of seven times to derive FMV, you would multiply the project's gross income by seven.

GRMs are most commonly used in connection with apartment project values.

The biggest problem with this rule of thumb is that it ignores variations in vacancy and collection losses as well as differences in operating costs. It can really only be used to compare similar property types since the expense factor can vary so dramatically between, for example, an apartment complex that might have a 30 percent operating expense factor versus a hotel project with 90 percent of its gross income offset by operating expenses.

Get Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.