- Getting the GRM for recent sold properties:Market Value / Annual Gross Income = Gross Rent Multiplier (GRM)Property sold for $750,000 / $110,000 Annual Income = GRM of 6.82
- Estimating value of property based on GRM:Let’s say that you did an analysis of recent comparable sold properties and found that, like the one above, their GRM’s averaged around 6.75. Now you want to approximate the value of the property being considered for purchase. You know that its gross rental income is $68,000 annually.GRM X Annual Income = Market Value
6.75 X $68,000 = $459,000
If it’s listed for sale at $695,000, you might not want to waste more time in looking at it for purchase.
Different cities will sometimes have different GRM’s, there are even instances where different areas in different citires will have different GRM’s. Different property types (duplex, triplex, fourplex) might have different GRM’s as well.
For Example: The average GRM’s in the city of Orange for the 4th Quarter of 2014 are:
Duplex: 18
Trplex: 14
Fourplex: 14
This, combined with comps in the area, is a common way to estimate an asking price. In many cases an agent will use Pro Forma rents instead of actual rents. Pro Forma rents are average market rents, actual rents are the actual rents the owner is collecting. Pro Forma rents are usually higher. Many lanlord/owners prefer to keep rents low. They do this in hopes to not get asked to fix things, as bad as that may sound. There are also the other extreme, the owners who will fix up the place and charge top market rents. For more information on this topic, contact me at (714) 922-0310.
