What is a gross rent multiplier (GRM) and how do appraisers use it?
A gross rent multiplier is a sale price divided by its rent. Appraisers build it from sales of similar properties that were leased when they sold, then multiply the subject's market rent by that GRM to get an income-based value. Fannie Mae requires the income approach for 2–4 unit properties, with the GRM math shown.
The GRM is a simple ratio with a picky diet
The gross rent multiplier is about as simple as appraisal math gets. Take a property's sale price and divide it by its rent. That number is the GRM.
The hard part is not the division. It is the diet. A GRM only means something if it comes from the right sales. Hondros, an appraisal education provider, explains that you start by finding sales of similar properties that were leased at the time of sale. Sale price divided by the rent those tenants were paying gives you a GRM for each sale. With several of those rented sales, you can develop a GRM you can trust.
Why leased sales? Because the ratio needs a real price and a real rent from the same property at the same time. A sale with no tenant has a price and a guess. Guesses do not divide well.
Gathering this data takes legwork. Hondros notes the usual data sources often do not have everything, so appraisers call agents, owners and landlords to confirm rents. Investors are used to those questions and are likely to share. I would rather make five phone calls than publish one invented rent.
It is called gross because it uses rent before expenses. It ignores taxes, insurance, repairs and the tenant who calls about the garbage disposal at 11 p.m. That is its strength and its weakness.
How an appraiser applies it
Once the GRM is set, the rest is multiplication. The appraiser figures the subject property's market rent, then multiplies it by the GRM to get an indicated value from the income approach.
Here is a made-up example. Say four similar duplexes sold while rented, and their GRMs came out close together. The appraiser picks a GRM from that range, based on which sales are most like the subject. Then market rent for the subject times that GRM gives the income value.
Notice the words market rent. Hondros points out that a property's current rent may not be market rent. A landlord who has not raised rent on a long-time tenant since flip phones were cool is collecting below-market rent. A unit rented to a cousin may be above or below. The appraiser estimates what the property would rent for today, supported by rental comparables.
One practical rule: use the same rent basis everywhere. If the GRMs were built from monthly rent, multiply monthly market rent. Mix monthly and annual and your fourplex suddenly appraises like a sports stadium.
What Fannie Mae requires
Fannie Mae's Selling Guide says the income approach is required for two- to four-unit properties. For one-unit homes, it may be appropriate in neighborhoods with a substantial rental market, and may not be appropriate where most homes are owner occupied.
When the income approach is used, Fannie requires the report to include the supporting comparable rental and sales data and the calculations used to determine the GRM. In other words, the appraiser has to show the work. Announcing a multiplier with no sales behind it does not count.
Fannie also says appraisals that rely only on the income approach are not acceptable. The GRM is a cross-check alongside the sales comparison approach, not a replacement for it.
Hondros adds a practical note. The rented sales used to build the GRM may not be the same sales on the main sales grid, because many small income properties sell vacant. Investors often empty a building to make showings easier. When that happens, the leased sales can go in an addendum to the report.
Where GRMs go wrong
Here is what I see in the field when an investor brings me a GRM they found on their own:
- Vacant sales sneaked in. A sale with no tenant has no real rent to divide by. Someone estimated it, and now the GRM is an estimate of an estimate.
- Different property types mixed. Single-family rentals, duplexes and fourplexes can trade at different multipliers. Blending them hides that.
- Old sales in a changing market. Prices and rents do not always move together. A GRM from a different market moment may not fit today, unless the sales are adjusted to current conditions.
- Expenses ignored. Two buildings with the same rent can have very different costs. A gross number cannot see that, which is why it is a cross-check.
- Current rent treated as market rent. See the cousin above.
A GRM is like a bathroom scale at the gym. Useful, quick, and nobody should make a life decision based on it alone.
How to check a GRM before you buy
- Collect leased sales only. Ask the listing agents or owners whether the property was rented at the time of sale and for how much.
- Match the property type and area. Duplexes with duplexes, same neighborhood or a close competitor.
- Check the dates. The more recent the sales, the better, and note any shift in prices or rents since.
- Divide each price by its rent on the same basis, and look at the spread. A tight range is more trustworthy than one wild outlier.
- Estimate market rent for your target, using current rental listings and leases, not the seller's pro forma.
- Multiply, then compare the result to what similar properties sold for. If the two stories disagree, find out why before you write an offer.
Key takeaways
- GRM equals sale price divided by rent, from similar properties leased at the time of sale.
- Appraisers multiply the subject's market rent by the GRM, and current rent may not be market rent.
- Fannie Mae requires the income approach for 2–4 unit properties, with the rental data and GRM math in the report.
- A GRM is a cross-check. It never stands alone.
People also ask
What is a good gross rent multiplier?
There is no universal good GRM. It depends on the property type, the area and the market at the time, so it has to be measured from local leased sales.
Is GRM the same as a cap rate?
No. A GRM uses gross rent and ignores expenses. A cap rate uses net operating income, after expenses, so it tells a different story.
Do appraisers use GRM on single-family homes?
Sometimes. Fannie Mae says the income approach may be appropriate for one-unit homes in areas with a substantial rental market, but it is not required.
Sources
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