Let’s suppose you are searching for a real estate investment, and you are reviewing a large number of los angeles income properties. In this list there are all kinds of different investment properties for sale- single family rental houses, duplexes, triplexes, quadraplex, 5 plexes and so on. How do you make sense of the information to quickly sort through the properties that are overpriced and once you have the list narrowed down, compare these different investment property types?
Which is the best investment?
The Gross Rent Multiplier (GRM) is a quick and easy tool that investors can use to review and compare different investment properties.
All you need is two numbers- the price and the gross income. GRM is the simple ratio of Price divided by Gross Income.
The LOWER THE GRM, the BETTER the investment.
Example Calculation: If the sales price of an Income property is $200,000 and the monthly total rent is $1,600- the annual gross rent is $1,600x 12 = $19,200. Divide $200,000/ $19,200 = GRM = 10.4
Here are the Results:
Were you surprised that Vidor had a worse GRM than Orange Dr? Clearly 4 units for less in a better area is the better investment. However Vidor has all four tenants at WAY BELOW market rent, and so the income for the building is not good. This illustrates the challenge with using GRM, because price per square foot kicks in even if the rents are very low- because of building replacement cost value. Additionally, although below market tenants cannot be evicted except for the 12 legal reasons under rent control, an owner may offer the tenants a buy out amount via a voluntary vacancy agreement- just because the rents are low, doesn’t mean they have to stay that way- even if the building is rent controlled.
GRM doesn’t factor expenses (like Cap rates does), nor vacancy reserve– it assumes 100% occupancy. GRM is too simple to make a final investment decision based on. GRM is useful for quickly sorting and comparing.
Properties in prime A+ locations have higher GRMs than properties in less desirable locations. Duplex, triplex and 4plex tend to have higher GRM’s than 5 unit+ multifamily property, because owner users compete with investors and drive up the prices to comparable single family house cost. GRMs are going to be lower in the USC neighborhood where the 32 unit buiding Hoover is located versus the Beverly Hills Adjacent Neighborhood Vidor is located in.
For investors a GRM of 12 will probably cash flow break even. A GRM of 10 or below will probably cash flow positive. GRM over 18 is not feasible as a straight investment, the most I would consider paying is GRM 15, when the property is located in the most prime Los Angeles areas.