Commercial Real Estate Definitions #2: What in the World is GRM?

Greetings from the handmade wig capital of the world…..Cedar Crest, NM!

The Christmas season is over and I have added to my layer of fat in preparation for the lean times ahead of me (us). Yes….you may think I unintentionally overate like the rest of the U.S. population….but my overeating is intentional….because I have been drinking the “Kool-aide” that the worst financial disaster we will ever see in our lifetime is upon us.

The reality is this is, the most opportunistic time in our lifetime is upon us…..r u ready? R u educated? Do you have a mentor? Have you made a commitment to take advantage of the opportunities before us? Are you tired of hearing of all the “doomsday” crap? Yeah….me too.

At the bottom of the post you will see a list of the latest news from the Blog-O-Sphere.  Check out the Paper Economy blog.  It is and has been one of my daily reads for a while now….did someone say “doom and gloom”?

Today, Emily Cressey has jotted down a few notes about GRM (Gross Rent Multiplier). Such as the Cap Rate (Capitalization Rate), the GRM is a widely misunderstood and poorly used

Emily Cressey speaking on Commercial Real Estate

asset analysis measurement. Thankfully, Emily not only defines but simplifies the use of GRM.

Gross Rent Multiplier (GRM)

The Gross Rent Multiplier (GRM) is a method of valuing commercial real estate (or other income property) that focuses only on INCOME. The GRM does not take into account any of the costs of operating the property, all it looks at is income. Refining further, it doesn’t even look at all the income, like laundry or vending income, it just looks at RENTAL income.

Here’s how it works:

GRM is a simple number (multiplier)  like 8 or 20. You look at a building’s gross annual rental income and multiply it by the GRM figure to get the “value” or “price of the property.

Ready for an example?

A 5-unit apartment building where each unit rents for $1,000 has a annual gross income of (5 units x $1000/month x 12 months = $60,000).

So the Gross Rental Income is $60,000 (Remember, in commercial property evaluation, we typically look at ANNUAL income and expense figures, not monthly figures.)

We take the asking price for the property and divide by the Gross Rent to find the GRM.

If they were asking $1 Million for the property, the GRM would be 16.67.

Price / Gross Rental Income = GRM

$1,000,000 / $60,000 = 16.67

Likewise, we can use a “goal” GRM to determine the most we’d be willing to pay for a property.

If we are looking for properties with a GRM of 8 or lower, we’d do this:

Gross Rental Income x GRM = Maximum Offer Price

$60,000 x 8 = $480,000

As you can see in this example, the size of the GRM drastically affects the perceived value of a property.

Talk to real estate agents to find out what the range of GRM’s is in your area. I would say 8 – 15 is a pretty reasonable range. Keep it on the lower end if you’re looking for properties that cash flow.

Here in Seattle, we often see GRM’s above 15, but these are for properties that don’t cash flow until you put about 40% down to buy them.

Properties often sell above that range if they are being promoted as “change of use” properties. For example, we had a wave of condo conversions in the past few years and developers were buying apartment buildings with GRM’s of 20 – more than any investor wanted to pay for the apartment building – because they were going to CHANGE THE USE from apartments into condos, and they could afford to pay more for the building and location because they had a different exit strategy.

Investors who look for property on the basis of GRM tend to be either real novices, or old hands who are very familiar with the costs of operating buildings in the area.

Since GRM’s give such a high-level look at the property (just evaluating a portion of the income, relative to price), scanning GRM’s can tell you if some properties are out of line for the market.

For example, if the rents in a building are especially low, the GRM would be higher than the norm for the area. That might represent a buying opportunity for a real estate investor who wanted to come in and raise the rents and thereby increase the value of the building. A very low GRM would indicate a property that is bringing in a lot of rent relative to its value. This might be an indicator that it has priced low for other reasons, for example, it may be in need of capital improvements or have other issues that the new owner will need to spend some time and money to resolve.

Personally, I don’t like to weigh the GRM too heavily because I feel, as a price indicator, it only tells a small portion of the story about a property.

However, it is quick and easy to calculate and as a rough-and-dirty guide, it can have some value.

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