How to Use Gross Rent Multiplier, and 5 Valuation Tools to Use Next

March 31, 2021

There were $478 billion in commercial real estate sales in 2020. The investors who came out on top in those deals did two things well: They said no to bad deals quickly, and they said yes to good deals confidently.

Gross Rent Multiplier (GRM) is a top-line valuation method that helps you say no to bad deals quickly. With GRM, you can compare the income potential between dozens of investment opportunities and against the market as a whole in just a few minutes.

Once you’ve narrowed the field to a few of the best potential earners, online valuation applications help you say yes confidently to only the best investments. They are PropTech solutions that surface and analyze information about commercial properties, and the market as a whole, so you can take much of the risk out of an investment.

Even for seasoned investors, GRM and online valuation tools are a powerful combination. Together, they let you quickly sift through hundreds of CRE opportunities to find the potential gold nuggets.
Use Gross Rent Multiplier for a quick reviewGRM is a simple property valuation method that relies on just two pieces of information. It’s used to screen potential “buy and hold” real estate investments and compare them to similar properties.

How to calculate Gross Rent Multiplier

GRM is the ratio of a property's value to the annual gross rent it produces. The lower the GRM, the better.

The GRM calculation is:

Property value / Gross Annual Rent = GRM

Here’s an example. Let’s say a small office building is listed for $2 million, and the annual gross rental income is $240,000.

$2,000,000 / $241,000 = 8.3

The GRM of that property is 8.3. If the average GRM of similar investments in the same market is 9.2, then this would be an attractive opportunity. It would be less attractive if other properties had a lower GRM.

Gross Rent Multiplier has several useful applications

For all its simplicity, GRM is a surprisingly versatile valuation tool. By manipulating the equation a little, you can compare new buy opportunities, estimate the value of a property, and even double-check that you’ve set the right rental rates on existing assets.

GRM is a sieve to filter out bad deals.
Just like our example above, you can find and compare the GRM for dozens of opportunities in a few minutes. Then, take the ones with the lowest GRM to the next level of due diligence.

GRM is a measuring stick to decide the value of a property.
Swap the order of the equation and you can estimate the value of a property based on the average GRMs in your market.

Say you’re trying to figure out the value of an office building. The full rent potential of the building is $144,000 per year. Other similar buildings in your area have an average GRM of 9.2. Place those numbers in the GRM calculation.

Value of your building / $144,000 = 9.2

or

Value of your building = $144,000 x 9.2 = $1,324,800

Based on the amount of gross rental income your building can produce, it has a value of $1,324,800.

GRM is a reality check for rents on properties you own.
GRM is a great way to quickly see whether your rent is keeping pace with the market.

If you’re trying to figure out the best rent, reorder the calculation again, this time leaving annual rent as the unknown. For example, if other office buildings in your market have a GRM of 8.5, and you know the value of your building is $2.5 million:

$2,500,000 / 8.5 = $294,111

In this scenario, you should be able to capture $294,111 in gross rental income from your building in this market.

If you’re grossing less than $294K in rent, you may be leaving money on the table.

GRM is a bellwether  for loan acceptance.
Relative GRM is a leading indicator of whether your loan is likely to be approved by a lender.

Real estate lenders use a loan-to-income ratio as an important test of the riskiness of a loan. In residential real estate, lenders use the income of the homeowner relative to the price of the property for this equation. In commercial real estate, they use the income of the property relative to its price.

While GRM doesn’t expose the whole income picture—there may be parking, vending, and other income sources—it does give you a general idea of it.

If you’re looking for funding on a property with a favorable GRM compared to others in the market, your lender is more likely to consider the loan a good risk.

There’s no single “good” Gross Rent Multiplier

There’s a common rule of thumb that monthly rents should equal about 1% of the property's value. That doesn’t always play out in reality. You often have to take GRM in context to know if the deal you’ve found is solid.

The GRM of a property that falls in line with the 1% rule is 8.3; that’s  a good GRM. But what if the average GRM of other opportunities in that area is 7.5? That 8.3 doesn’t look as good.

Likewise, you may not find a single deal in a higher-priced market that’s near 8.3 or the 1% rule. You’ll have to compare existing GRMs to find the best available.

Gross Rent Multiplier does have some flaws

Simplicity is the best asset of the GRM valuation method. But its lack of complexity also leaves it vulnerable to poor data and unable to surface some risks.

You won’t always know (the true) rent rolls.
Before you do your own due diligence, you have to take rent rolls on trust. Sometimes, sellers offer rental income that’s more optimistic than realistic, leaving the GRM artificially low.

You can’t use GRM to calculate payoff period.
Figuring the payoff period—the time it takes to collect enough income to recoup your initial investment—is a good reality check that the investment was worthwhile.

GRM doesn’t allow you to calculate the payoff period because it’s based on gross rental income. It doesn’t account for all costs of ownership, such as maintenance, loan costs, and repairs.

GRM doesn’t account for vacancy rates.
Rental income is often an estimate based on full capacity. A property can have a great GRM but be unprofitable if vacancy rates are high.

This becomes a double whammy if you have to complete renovations. Renovation means vacancy (loss of rent) and out-of-pocket costs.

GRM works well as a loose sieve, filtering out investments with a low-profit probability. Once you find the best potentials using GRM, you’ll need a way to complete an in-depth review that verifies data and surfaces hidden risks.

Then use these 5 tools for an in-depth valuation

GRM will help you narrow down a broad field of investment properties. These valuation tools will help you dig deep into each to find the best of the best opportunities.

1. biproxi

biproxi is an all-in-one listing, marketing, and transaction platform.

biproxi make an offer tool for commercial real estate investing
Soure: biproxi.com

Before you can complete any valuation method, you need data. biproxi’s listing service is where you go to find it. With hundreds of thousands of properties listed that are thoroughly vetted and updated often, you can surface everything you need to know about a potential investment in one place.

Since biproxi also provides marketing automation, you can easily share listing information with potential buyers and investors, making it easy for them to review opportunities at the same time.

Biproxi is 100% free for investors to use.

2. Compstak

Compstak is a crowdsourced sales and comp data platform.

compstack commercial comp data
Source: Compstak.com

On Compstak, you’ll find both property details and market analysis supplied by the professionals doing the deals.

The information comes from commercial brokerages, appraisal firms, and public records. It’s all rigorously reviewed for completeness and correctness.

With Compstak, you can see who recently bought and sold a property and who’s leasing in those buildings, plus how much they pay. That information is critical for valuation and understanding greater market trends.

Compstak doesn’t list its prices publicly.


3. CREmodel

CREmodel is an Excel-based real estate financial model.

CREmodel excel tables showing real estate finance model
Source: CREModel.com



You bring the data, and CREModel does the math. Just enter what you know about a property and the model will calculate your return on investment, loan-to-value ratio, internal rate of return, and several other valuable calculations.

The output is presented in a basic but easy to scan Excel spreadsheet. Anyone in the deal pipeline will be able to find and interpret the information most relevant to them.

You can get the CREModel for a one-time fee of $89.


4. TheAnalyst PRO

theanalyst pro modified internal rate of return graph
Source: TheAnalyst PRO


TheAnalyst PRO is a full-feature investment modeling software.

With plenty of visuals and several financial and property reports available, TheAnalyst PRO picks up where CREmodel leaves off. Enter your data and the model creates marketing-worth reports for:

  • Cash-flow analysis
  • Lease vs. own analysis
  • Projected ROI
  • Location risk analysis
  • And more

TheAnalyst PRO is cloud-based, so you can save data and reports indefinitely for future reference. Plus, it’s available from all your devices, which means you can present results on the fly.

TheAnalyst PRO plans start at $69.99/month plus a one-time account setup fee of $49.00.


5. Valuate

valuate rent roll inputs table
Source: Valuate by REFM

Valuate is an online valuation template with several financial modeling options.

Valuate offers many of the same financial models and reporting capabilities as TheAnalyst PRO. The standout feature of Valuate, though, is its rent roll dashboard.

If your properties often have many tenants, as multifamily or large office buildings do, the rent roll dashboard gives you a cruising-altitude view of the status of each.

Valuate offers a basic free plan and paid subscriptions start at $19/month.

Get your workflow off the spreadsheet

PropTech tools like the ones we’ve included here help brokers and investors make better decisions, track progress, and create stronger communications for their stakeholders.

Yet digital adoption in our space is slow. Roughly two-thirds of CRE professionals say they have the resources and skills to operate a digitally transformed business. This leaves them vulnerable to the one-third who can leverage tech to move faster and more confidently.

To catch up, brokers and investors will need to review each phase of their workflow—from searching for new properties to marketing them to closing transactions—and find the tools, like biproxi, that automate and integrate each of those jobs.

Ember Hansen
With over a decade of marketing & business development experience, Ember brings a fresh perspective on CRE to the biproxi leadership team by turning her passion for SaaS into actionable insights for brokers and investors looking leverage technology to create a more successful business.
Article headline