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The gross rent multiplier is a sale price divided by gross annual rent, and price per unit is a sale price divided by the number of units. Both let you hold a building up against recent sales in seconds. Both leave out expenses, and that is exactly where they go wrong.
- A GRM uses rent before vacancy and before expenses, so it prices two buildings with the same rent the same, even when one costs far more to run.
- Check whether a GRM was figured on annual or monthly rent. For the same sale the monthly figure is twelve times larger.
- Price per unit counts a studio and a three-bedroom the same and ignores rents, condition and land.
- Both come from the same comparable sales as a cap rate, and both only carry over between buildings that are alike.
What the gross rent multiplier is
The State Board of Equalization's appraisal course defines the gross income multiplier as a sale price divided by the property's anticipated potential gross income, and explains that multipliers are derived by comparing the sale prices of closely comparable properties with their gross income or gross rent. The gross rent multiplier is the rent-only version of the same idea.
Using one takes two steps. First measure it on a comparable sale. With invented numbers, a building that sold for $1,000,000 while scheduled to collect $100,000 a year in rent has a GRM of 10. Then apply it to yours, by multiplying your building's gross annual rent by that GRM. That is the whole method, which is its appeal and its weakness.
Annual or monthly, and which rent
A GRM can be figured on annual rent or on monthly rent, and nobody is obliged to say which. For the same sale the monthly version is twelve times the annual one, so a figure you heard in conversation could be off by a factor of twelve if you apply it to the wrong rent. The calculator on the homepage multiplies annual scheduled rent, so divide a monthly GRM by 12 before you enter it.
Two more questions belong with every GRM you collect. Was it measured on scheduled rent or on rent actually collected after vacancy? The Board of Equalization's course treats the second as a separate measure, the effective gross income multiplier. And did the rent include laundry, parking and other income, or rent alone? A multiplier measured one way and applied another way is a different number from the one the sale produced.
What price per unit is
Price per unit is a sale price divided by the number of units. A comparable that sold for a given price with a given number of units gives you a figure, and you multiply it by your own unit count. Some buyers also compare price per square foot of building, and for older buildings on large lots, price per square foot of land. Each is a way of asking what one piece of the building or the site traded for, with the income left out.
When small-building buyers rely on them
When the expenses cannot be trusted. Rent can be checked against leases and bank deposits. Expenses on a small, self-managed building can be scattered across the owner's personal accounts, and a buyer who cannot rebuild a reliable NOI falls back on the figures that can be checked. That puts the GRM in charge by default.
When the buildings really are alike. On a street of buildings of the same age and construction, with the same utility setup and similar rents relative to market, expense ratios are more likely to be similar. In that setting a GRM from one sale says something real about the building next door.
For two to four units. For loans that follow Fannie Mae's rules, duplexes, triplexes and fourplexes are appraised on its Small Residential Income Property Appraisal Report, a form built for that size of property that supports its opinion of market rent with comparable rentals. Gross figures are a quick way to set one small building beside another.
For a first screen. A buyer looking at many listings can use a GRM or a price per unit to decide which ones deserve a full underwriting. Screening is a fair use. Pricing from the screen alone is not.
The blind spots
| What differs between two buildings | What the GRM does | What price per unit does |
|---|---|---|
| The owner pays tenants' gas and electricity in one | Misses it entirely | Misses it entirely |
| One needs a roof or a retrofit | Misses it | Misses it |
| Studios in one, two-bedrooms in the other | Captures the rent difference | Counts every unit the same |
| Rents far below market in one | Can mislead in either direction | Ignores rent altogether |
| A larger lot or more permitted density in one | Misses it | Misses it |
Expense ratios
The Board of Equalization's course warns that when you compare multipliers, the comparables and the property being valued should have similar expense ratios. Under rent control that condition is easy to miss. Two buildings with the same units and the same costs can have very different expense ratios, because insurance, repairs and property tax do not fall when rents are low. A GRM carried from a building at market rents to one with deeply below-market rents assumes the second building keeps as much of each rent dollar as the first, and it does not.
Rents compared with market
A building whose rents sit far below market can sell at a higher multiple of its current rent, because the buyer is paying partly for increases expected when units turn over. A building already at market has no such cushion. Apply the first building's GRM to the second and you overvalue it. Apply the second's to the first and you undervalue it. This pulls against the expense ratio effect above, which is why a GRM carried between the two kinds of building can miss in either direction. How fast rents can reset depends on the local rent rules, covered on the page about rent control and value. Whether a particular unit can be reset depends on why its last tenancy ended, which is a question for a landlord-tenant attorney. Shaya Lowenstein is a real estate agent, not an attorney.
Units that are not alike
Price per unit treats a 400-square-foot studio and a 1,200-square-foot three-bedroom as the same thing. Carry a per-unit figure from a building of studios to a building of three-bedrooms and you undervalue the larger units. Carry it the other way and you overvalue the studios. It also says nothing about the land. An older building on a lot zoned for many more units may be worth more as a site than any per-unit figure from ordinary sales suggests. The page on what raises or lowers value covers zoning upside and unit mix in more detail.
Using them alongside the income approach
Run all three measures on the same set of comparable sales: the cap rate, the GRM and the price per unit. If the value from the GRM or the price per unit disagrees with the value from the cap rate and NOI, the disagreement is information. Look first at three differences between your building and the comparables: expense ratio, rent level relative to market, and unit mix. Find which one it is, and you will know which figure to trust.
Shaya can pull the sales that match your building and show you all three measures side by side, with the differences explained.