The formula

GRM = price / (monthly rent x 12)

Take the asking price and divide it by the rent the property would bring in over a full year, before vacancy and before any costs. The answer is how many years of gross rent it takes to equal the price.

A lower GRM means you pay less for each dollar of rent. A GRM of 8 means the price is 8 years of rent. A GRM of 14 means 14 years. That is all it says. It does not know about taxes, insurance, repairs, vacancy or the loan.

Some sources use monthly rent instead of yearly rent. That gives a number 12 times larger, so a yearly GRM of 10 is a monthly GRM of 120. This site and its calculator use yearly rent.

Worked example

Made-up numbers for two listings in the same town. They are not real properties and not the calculator's starting numbers.

  • Property A: price $300,000, rent $2,500 a month. Yearly rent: $2,500 x 12 = $30,000. GRM: $300,000 / $30,000 = 10.00
  • Property B: price $275,000, rent $2,000 a month. Yearly rent: $2,000 x 12 = $24,000. GRM: $275,000 / $24,000 = 11.46

On GRM alone, A looks cheaper. You pay 10 years of rent instead of about 11.5. Hold that thought, because the expenses below change the answer.

Estimating value with GRM

Appraisers and brokers sometimes turn the formula around to get a rough value. If similar small rentals nearby sold at a GRM of about 10.5, you can multiply that by a property's yearly rent.

Rough value = market GRM x yearly rent

Made-up example: a house rents for $2,300 a month, so $27,600 a year. At a market GRM of 10.5, the rough value is 10.5 x $27,600 = $289,800. If the seller asks $320,000, the GRM at that price is $320,000 / $27,600 = 11.59. That is well above the sales you compared, so you would want a reason, like lower costs or room to raise rent.

This works only when the comparables really are similar: same kind of building, same area, and the same split of who pays utilities. A market GRM from duplexes says little about a single-family house across town.

Where GRM misleads

GRM ignores every cost. Two properties with the same rent can have very different expenses. Go back to the example and add made-up costs. Both use 5% vacancy.

  • Property A pays the water, trash and a higher tax bill. Operating costs: $12,000 a year. Collected rent: $30,000 x 95% = $28,500. NOI: $28,500 - $12,000 = $16,500. Cap rate: $16,500 / $300,000 = 5.50%
  • Property B has tenants who pay their own utilities. Operating costs: $7,200 a year. Collected rent: $24,000 x 95% = $22,800. NOI: $22,800 - $7,200 = $15,600. Cap rate: $15,600 / $275,000 = 5.67%

B had the worse GRM and the better cap rate. Costs flipped the ranking. That is the main reason to treat GRM as a first filter, then move to net operating income. If NOI is new to you, read what is NOI.

Other things GRM misses:

  • Vacancy. A building in a slow rental market loses more rent than one where units fill in days.
  • Condition. A low GRM on a building that needs a roof is not a bargain until you add the roof.
  • Rent quality. A GRM built on an optimistic rent, or on rents well above the local market, is not comparable with one built on actual leases.
  • Financing. GRM says nothing about the payment or whether the deal cash flows.

GRM and the 1% rule

The 1% rule says monthly rent should be at least 1% of the price. That is the same idea as GRM, written another way. Rent of 1% a month is 12% a year, and 1 / 0.12 = 8.33. So a property that meets the 1% rule has a GRM of 8.33 or lower.

Property A above has monthly rent of $2,500 / $300,000 = 0.83% of price, which matches its GRM of 10.00 (1 / (0.0083 x 12) is about 10). Neither screen tells you about costs, so both share the same blind spot.

How to use it well

  • Use it to sort a long list of listings quickly, then run full numbers on the few that pass.
  • Compare GRMs only within the same area and building type.
  • Use real rents from leases or from similar units that rented recently.
  • Always follow up with NOI, cap rate and cash flow. See what is a good cap rate for the next step.

Try the cap rate calculator. It shows the gross rent multiplier next to the cap rate and the 1% rule check, so you can see all three at once.

FAQ

What is a good gross rent multiplier?

There is no single good number. Lower means you pay less per dollar of rent. Compare a property with similar ones that sold nearby, not with a national rule of thumb.

Is GRM the same as cap rate?

No. GRM uses gross rent and ignores expenses. Cap rate uses net operating income, which is rent after vacancy and operating costs.

Should I use monthly or yearly rent?

This site uses yearly rent. Some people use monthly rent, which gives a number 12 times larger. Check which one a source means before you compare.

How does GRM relate to the 1% rule?

A property that meets the 1% rule has a GRM of about 8.33 or lower, because 1 divided by 0.12 is 8.33.