A Gross Rent Multiplier is a simple tool that tells an investor whether or not the price and rent are in a range comparable to other properties in the same market.
Monthly Gross Rents (the amount of monthly income that comes in for rent) multiplied times 12 months = Annual Gross Rents, divided by the price = Gross Rent Multiplier.
While it is a rule of thumb, and is only useful in comparison to other properties offered for sale in the same market, it is not a very good measurement of price and value because it does not take into effect the operating expenses. This calculation would require coming up with a Cap Rate, which is Annual Gross Income less Annual Operating Expenses = Net Operating Income (Caution: Mortgage is not an operating expense it is debt service and is not part of the calculation for Net Operating Income). Divide the Net Operating Income by the sales price and you have the cap rate. For example $100,000 of NOI (Net Operating Income) divided by a sales price of $1,000,000 = a 10 cap rate. And that is a very good cap rate. Cap rate is a measurement of the risk of attaining the Net Operating Income $. The higher the cap rate the less money you pay for the NOI $. The lower the cap rate the more you pay for the NOI $.
Mary Sawyer, CCIM
Feb 1, 2010