PROPERTY VALUES:
Appraising with Gross Rent Multipliers
From the CCIM INSTITUTE

What is a Gross Rent Multiplier (GRM) and how can it help you buy or sell real estate at its fair market price?

When appraising investment grade commercial real estate, many real estate professionals rely on a proven formula, the GRM, to give them a good "ballpark" idea of what a property is worth.

According to Steve Rosanky, CCIM, of Texas Income Property, in Austin, Texas, the GRM is a common rule of thumb long used by real estate professionals to estimate property value.

"The Gross Rent Multiplier is a number obtained from information gathered in a specific neighborhood about property that has been recently sold," said Rosanky. "For duplexes or fourplexes the GRM is arrived at by dividing the sale price of the property by the fair market monthly rent."

“Once you determine the neighborhood GRM, it is easy to determine the value of rental properties in the area. You simply multiply the GRM by the gross monthly rent of an investment property such as the duplex or fourplex. The result is a close estimate of the value of the property in question.”

For example, a duplex generating $2,000 in monthly gross rents ($1,000 per side) in a stable neighborhood in which the monthly GRM is 80, the property may be worth $160,000 (80 x $2,000 = $160,000). “The GRM has limitations and can vary from neighborhood to neighborhood,” Rosanky advised, “but it is a useful tool as long as you are aware it can only produce a ballpark estimate. It is invaluable in this regard until you need a more precise estimate.”

Gross Rent Multipliers are usually expressed in one of two ways:

• For small income properties, such as rental houses, duplexes, and fourplexes, a monthly multiplier is often used.
• For larger commercial properties or apartments, annual multipliers are more common.

According to Rosanky, the GRM for duplexes and fourplexes can vary from neighborhood to neighborhood within a metropolitan area and depends on market activity of recently sold property “Most appraisers determine a GRM for a particular neighborhood by calling real estate brokers who have recently sold listings to verify the sold price of a property and the fair market rent at the time of sale.

“With these two numbers — price and rent — a GRM is established for that property. Averaging three or more GRMs for a given neighborhood gives you an estimate of the local GRM.”

Rosanky pointed out that to arrive at a close approximation of value, adjustments sometimes need to be made for any unusual conditions that may have affected the sale, such as concessions for repairs or loan fees paid by the seller. In addition, using current rents may be misleading if, for example, it is set at an outdated rate which has remained unchanged for a resident who moved in several years ago. Fair market rent should always be used.

In addition to the GRM formula for estimating market value, real estate professionals have two other methods they may use:

• The “market method,” which compares similar properties on a per-square-foot basis.
• The “replacement method,” which determines the cost of new construction, less depreciation.

For More Information Contact Steve Rosanky at Info@TexasIncomeProperty.com

The CCIM Institute www.ccim.com is an affiliate of the National Association of Realtors. Its members include professionals who have earned the Certified Commercial Investment Member (CCIM) designation, and who are involved in commercial real estate brokerage, leasing, investment analysis, and asset management, as well as allied professionals in appraisal, banking, corporate real estate, taxation, and law. This designation is recognized as a mark of professionalism and knowledge in commercial investment real estate.

Southern L.A. County Apartment Management, August 1994