Using Gross Rent Multiplier With Real Estate Investments

Recently, I stumbled across a national study that mirrors a measurement that I conduct from time to time, and that is comparing the sales price of properties to the going rental rates that these properties could generate as investments. This Gross Rent Multiplier is a neat little rule of thumb that will help you anticipate the potential for great long-term returns on real estate investments. The formula for calculating the Gross Rent Multiplier is

Market Value ÷  Annual Gross Income = Gross Rent Multiplier (GRM)

The reason that we measure activity in the Tallahassee housing market so diligently is to find signs that the market is changing, growing, receding, or just doing anything that our customers should know about. For those people who live in Tallahassee and have no plans to move, most of this information is a gross overkill, but to those who are investors or prospective home buyers, knowledge is power.

Tallahassee Housing Market Second Best When Compared To Other Cities In The US

Trulia conducted a simple study that they called a “rent versus buy” index where they analyzed the largest 50 cities in the US. They calculated the price-to-rent (GRM) using the average list price compared with the average rent on 2 bedroom apartments, condos and townhomes listed on their website. While their interpretation of the results were flawed (they claimed that a GRM of 15 was less expensive to own than to rent … WRONG!), the data that they generated allows an investor to consider one market versus another.

In order to “add” Tallahassee to this study, I used the median rent price from their site with the average price of a similar property in the Tallahassee MLS. I then did the comparison and added Tallahassee to the results of the Trulia study, which are listed below.

US Cities Measured Using Gross Rent Multiplier

City State Avg. List Price Avg. Rent Gross Rent Multiplier
Minneapolis MN $153,844 $1,700 8
* Tallahassee FL $90,693 $990 8
Arlington TX $72,422 $789 8
Miami FL $189,566 $2,019 8
Fresno CA $90,446 $936 8
San Antonio TX $89,068 $884 8
Mesa AZ $71,317 $697 9
Jacksonville FL $92,488 $870 9
Phoenix AZ $100,535 $883 9
El Paso TX $95,388 $770 10
Las Vegas NV $128,815 $983 11
Detroit MI $151,726 $1,128 11
Houston TX $164,487 $1,163 12
Baltimore MD $187,998 $1,300 12
Tucson AZ $129,800 $879 12
Long Beach CA $260,449 $1,746 12
Austin TX $165,326 $1,101 13
Virginia Beach VA $178,522 $1,093 14
Sacramento CA $152,696 $934 14
Washington DC $469,150 $2,773 14
Oakland CA $278,245 $1,625 14
Albuquerque NM $137,110 $792 14
Raleigh NC $146,010 $840 14
San Jose CA $298,621 $1,691 15
Chicago IL $303,085 $1,697 15
Charlotte NC $168,620 $929 15
Colorado Springs CO $144,074 $773 16
Indianapolis IN $141,486 $752 16
Honolulu HI $583,858 $3,080 16
Columbus OH $143,267 $739 16
Los Angeles CA $491,055 $2,460 17
Boston MA $536,956 $2,623 17
Milwaukee WI $271,040 $1,322 17
Atlanta GA $244,610 $1,193 17
Nashville TN $221,377 $1,078 17
Tulsa OK $144,454 $700 17
Philadelphia PA $323,912 $1,523 18
Denver CO $283,432 $1,315 18
Louisville KY $157,667 $720 18
Memphis TN $164,226 $747 18
Dallas TX $293,767 $1,324 18
Cleveland OH $246,895 $1,046 20
San Diego CA $396,409 $1,670 20
Kansas City MO $240,076 $992 20
Oklahoma City OK $195,663 $763 21
San Francisco CA $774,728 $2,996 22
Portland OR $307,858 $1,145 22
Seattle WA $461,330 $1,546 25
Omaha NE $275,844 $870 26
Fort Worth* TX $328,076 $907 30
New York NY $1,383,612 $3,538 33

Using Gross Rent Multiplier With Real Estate Investments

Historically, most rental properties in Tallahassee sold for a GRM of less than 9, but when we could find a property that will sell for less than a 7, we knew it could be a “no brainer” investment that would deliver a ROI that would exceed 20% if leveraged correctly. I think most people would agree that an annualized return on investment exceeding 20% would be exciting by today’s standards.

The way that I would use the Gross Rent Multiplier would be simple. If a property hit the market that I thought looked promising, I would call my favorite Tallahassee REALTOR® and ask him what he thought he could lease it for on a sustainable basis. Then, using that number and the number for which I could acquire the property, I would calculate my GRM and then make a purchase decision. Not exactly rocket science and a very effective way to conduct property screening.

Why Gross Rent Multipliers Must Now Drop

Unfortunately, historical information must be adjusted in our current environment. Increased property taxes and increased insurance costs are combining to create higher expense ratios when compared to rent. Rents have not risen much (and even have dropped) due to the glut of supply of homes in the Tallahassee housing market.

I would think that an investor wanting to accumulate properties as we come to the low point in home prices should be looking for homes priced at a GRM of no more than 7, but with expectations of finding properties that can be found below 6. Here is an example of one such property that was recently available in Tallahassee.

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About Joe Manausa, MBA

Joe Manausa, MBA is a 22+ year veteran of real estate brokerage in the State of Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

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Comments

  1. Hey Dude,
    Your style of presentation is very impressive. The meaningful contribution of your mind reflects on those people who are looking for using gross rent multiplier with real estate investments. I would like to tweet on it and keep spying at every moment you blogging.

  2. Joe, I liked your article on GRM. I will keep it some of the info on my westpointbusinessbrokers blog. Nice job.

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