What’s Better – GRM (Gross Rent Multiplier) or Cap Rate (Capitalization Rate)?
Actually, we’re going to talk about both GRM and Cap Rate, as they each have their value in the due diligence process involved in buying or selling real estate investment property. They can support each other, and both are valuable tools for the real estate investor’s toolbox. Dean Graziosi GRM as a fast comparison tool – First, let’s see how we calculate GRM: Market Value divided by Annual Gross Income = GRM So, if we are considering the purchase of a property at $750,000, and an annual income from rents of $110,000, we have: $750,000 / $110,000 = 6.82 GRM You can also work it the other direction if you’re considering selling a property. Taking an area average GRM and multiplying it by your annual gross income, you can get an estimate of a place to start for setting a selling price. The problem with GRM is that it isn’t a really precise tool. However, it is fast, particularly when you can get some data from the area as to other properties that have sold, and their GRMs. It is a fast tool, allowing an investor to quickly compare a number of properties for the purpose of honing in on those that appear to present the best opportunity. Then, more detailed analysis is begun, frequently using Capitalization Rate as one of the tools. http://www.aboutdeangraziosi.com