Gross Rent Multiplier: Pricing Fair Value For Smaller Properties This is the rule of thumb number used to determine the value of a smaller rental property. Single family homes generally arent evaluated using a rental figure when pricing the property for a listing, because it will be lived in. Its a home not an investment. Part two of this series will look at the gross rent multiplier as a pricing mechanism. The beauty of the GRM is its simplicity and ease of use. t will allow you to do a down a dirty calculation of several properties on a napkin, if necessary. It wimplifies property variables so that all properties with differing vacancy rates and operating expenses can be compared apples to apples for a quick comparison. It should get you to the short list fairly quickly. However, as we learned in part one the price of a property is in more than its cash flow. Peolple will pay more for location or condition etc.
What is it Gross Rent Multiplier is the ratio of price to annual rental income before expenses such as property taxes, insurance, and even utilities or the cost of hiring a property management company. To sum up Gross Rent Multiplier it is the number of years the property would take to pay for itself in gross received rent. For the investor,the higher the GRM the longer it will take for the property to pay for itself. The GRM is useful for comparing and selecting investment properties where depreciation effects, periodic costs (such as property taxes and insurance) and costs to the investor incurred by a potential renter (such as utilities and repairs) can be expected to be uniform across the properties. These costs are also more difficult to predict than market rental return, so the GRM serves as an alternative where such a measures would be difficult to determine. Wikipedia When looking at evaluating a property to determine if its priced well professionals look at two methods: You can evaluate a property or establish a listing price using either the gross income or the net income. GRM is a formula based on the property's gross income production.
The List Price / The Gross Scheduled Income = GRM
Take the GRM from the above equation and compare it to similar properties in the same area. You can get this information from the real estate agent or from lenders in the area. It will help you get compare the asking price to similar properties. Now for some basic market analysis: If the property has a higher GRM than similar properties in your area you can try and derive at a more accurate price by using the properties Gross Income and the GRM in the marketplace in this way:
Gross Income x Market GRM = properly priced value for that property
Keep in mind there may be other reasons why a property has a higher listing price such as better good curb appeal or best location, away from noise etc. Also keep in mind that the GRM excludes real vacancies rates (it assumes 100% full rental) and it doesnt include operating costs. Likely a building with lower operating costs, less maintenance might be worth more and the asking price would reflect that too. Now you have arrived at a price that you can use to begin the negotiations. REsourced from www.yourpropertypath.com You may republish this article, as long as you do not edit and you agree to preserve all links to the author and www.yourpropertypath.com
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