What is gross rent multiplier?

The gross rent multiplier (GRM) is a valuation tool primarily used to assess the potential value of smaller residential investment properties. This metric is derived from the relationship between the cost of the property and the rental income it generates. To calculate the GRM, one takes the property’s purchase price and divides it by its gross annual rental income. This simple formula allows investors and appraisers to quickly estimate the value of a residential property based on its income-generating potential.

Calculating GRM provides insight into how multiple properties compare in terms of their income generation relative to their prices, thus facilitating informed investment decisions. This approach is particularly useful in residential real estate, where cash flow and rental income are critical factors in defining a property’s value.

The other choices do not accurately represent the specific application of GRM. While setting a list price or estimating income might relate to broader investment analysis, they do not specifically encapsulate the essence of gross rent multiplier as it pertains to smaller residential investments. Similarly, determining the value of commercial properties typically involves different metrics and calculations that can be more complex than those used for residential properties.