Gross Rent Multiplier

[Peggy Wright]

Hi guys and gals. Doing a bit of reasearch as I really want to start doing more income appraisals for small income.

GRM = ratio of sales price divided by the gross rents

On the URAR of alamode, under Value Indicated by Income Approach is :

rent/mo x GRM = value. Now, I understand that the GRM is usually considered more in rent/year than month.

so, if for example, the sale price is $115,000 and the Gross annual rent is $13,700 then the GRM = .119

On the Income approach section, if I fill it out as they have it, I would put in 1140/mo x .119 = 135.66

What am I doing wrong?

 

[Fred]

so, if for example, the sale price is $115,000 and the Gross annual rent is $13,700 then the GRM = .119

115,000/13,700 = 8.39 GRM
13,700/115,000 = .119

 

[George Hatch]

Definitions:

Gross Rent Multiplier (GRM) - The relationship between the sales price (value) and monthly rental income for single family residential properties.

Gross Income Multiplier (GIM) - The relationship (ratio) between sales price (value) and either Potential Gross Income or Effective Gross Income in income producing properties.....

Immediately above that entry, under the definition of "Gross Income", the dictionary also states that it is "customarily stated on an annual basis".


The difference between the two is that GRMs are based on monthly rents and GIMs are based on annual income. The annualized income streams are supposed to include items like rent concessions, varying expense terms, absorption, etc.


More specifically, "residential properties", which includes 1-4s, are most commonly valued in the Income Approach based on GRMs. "Non-residential properties", which includes apartments with 5+ units as well as other office, retail, commercial and industrial uses, are valued using the annualized GIMs, either based on the basis of Potential Gross Income Multiplier (PGIM), or Effective Gross Income Multiplier (EGIM). Realistically, there's no reason we couldn't use Net Operating Income Multipliers (NOIM), although it's not real common at this time.

So to answer your question, if you use the monthly rents for the GRM in both the URAR and the 2-4 apartment form, alamode's formware calculations will work correctly.

Back to your example, the GRMs demonstrated in your sales, if you are lucky enough to have such data, are probably in the 100.00 range, although around here where I live it's more like 170.00+. Anyways, the calculation would probably look like this:

Mo Rent x GRM = Value
$1,140 x 100.00 = $114,000

 

[Restrain]

If you have rentals, say between $800-$1200 per month and sales of other homes, you can use the rentals and estimate what the sales would rent for per month. So the GRMs for each of the sales would be the estimated monthly rental divided into the sales price, or $120,000 sale price/$1200 rental = GRM of 100. You don't have to have sales of rental properties to generate your GRM.

Roger

 

[The Bob]

My experience with SF rentals is that the GRM's are all over the place. I have made it a habit to quiz investors about what they are looking in an income property and I have never heard the same answer. It ranges from "...as long as I can net $200/month" to "...I will pay "x" times the gross rent". I think this is the major flaw in applying the "income" approach (it really isn't an "income" approach....it's a market derived method of comparison) to single family rentals. Apartments and the like may be different, but this has been my experience with single family.

P.S. I agree with RS and George H.

 

[Peggy Wright]

ahhhhhhhhhhhhhhhhhhhh clarity! Thanks!

 

[Austin]

I was reading a post on another forum the other day by Terrell Shields and he was being questioned by a state appraisal board investigator. The investigator told Terrell that it was never appropriate to use a GIM. All the GIM is the GRM divided by 12. As the old saying goes: "If she knew anything about appraising, then why is she working for the state appraisal board?"
Locally the best method of getting an accurate price estimate on multi unit apartment complexes is using GRM and they are highly consistant. I appraised about five large apartment complexes one year and did detail analyses, interviews with rental managers, etc., this was back before limited appraisals were permitted, and everything was full appraisal with a detailed complete report. After all of that work I found that all I needed was a rent estimate and a GRM. I can appraise any apartment complex in town in one minute. If it is older the GRM is 70 and if it is new it is 85. You can scale where they fall in between. I have never seen a significant variance from these numbers. But, I had to do it the hard way to find this out. When you interview managers and investors it makes you wonder what the point of USPAP is. Generally if they can make the payment with a little left over they are happy. I have heard that line at least 100 times. I wonder if that is their opinion or their estimate?

 

[EDWARD BERRY]

Over the last 20 years I have asked students who are homeowners how much they want for rent on their house.

It usually is a little above the mortgage payment.

Management companies have good data(about 0.50/sf/month here)

The State RE Lic test has about one test question.

Works good on duplexes, 4 plex, 6 plex and Austin said more.

Happy calcs.ed

 

[Robert Faber]

HUD website has market rents for all U.S. counties

Here is a sample:

Michigan markets and fair rents, 2003

Go to the HUD website and in the search engine type "Your market name" market rent. You will be linked to a pdf with fairly recent data like the one above, but you'll still have to work out all the other adjustments and data yourself. The data provided might help, might not. Just saying it's there.

 

[Eberl]

Sales price divided by gross monthly rent = Estimated value of subject. GRM as calculated on the 1004 form is calculated as follows: Comparable Sales Price / monthly gross rent = GRM. So once you figure out the average GRM for the comparables and then multiply it by the subject's gross monthly rent, you come up with a rough estimate of value for the subject.