How to know if your rental property is performing up to its potential, or how to gauge which property you should buy for a rental investment.
The single greatest test to see how well a rental property is or will perform is a simple equation called GRM or Gross Rent Multiplier.
GRM is really pretty simple, and while certainly not the only criteria for your rental investment, it is the first thing an investor should look at.
Let's say you bought a single family home for $250,000 amnd it currently rents for $1,250 per month. That's an annual of rent $15,000. Take that $250,000 purchase price and divide it by $15,000.
250,000/15000=16.67
Your GRM or Gross Rental Multiplier is 16.67.
In different areas or real estate markets the expected GRM may differ considerably. In an area like Denver this 16.67 GRM, would be much too high as the goal is to have as low a GRM as possible. Keep in mind that the GRM is also how many years it would take to pay for the purchase price of the property. 'Make sense why it's important?
While in Denver a GRM of 12 or less is good and expected, it may not be possible to achieve quite as low a number in Pagosa. By raising the rental amount monthly to $1,400 on our example of a home valued at $250,000 we lower our GRM to 14.88. Now less than 15 GRM, we are getting a better return, which in Pagosa would be acceptable. Once the GRM rises over 15, the return on the investment property in Pagosa Springs may be lacking.
Next time we will talk about CAP rate and Net Operating Income.
Robbie Pepper
CCIM, GRI, CNE, e-PRO
PO BOX 900
Pagosa Springs, CO 81147
robbie@frontier.net
970-946-2352 cell
970-731-8599 office
GRM is really pretty simple, and while certainly not the only criteria for your rental investment, it is the first thing an investor should look at.
Let's say you bought a single family home for $250,000 amnd it currently rents for $1,250 per month. That's an annual of rent $15,000. Take that $250,000 purchase price and divide it by $15,000.
250,000/15000=16.67
Your GRM or Gross Rental Multiplier is 16.67.
In different areas or real estate markets the expected GRM may differ considerably. In an area like Denver this 16.67 GRM, would be much too high as the goal is to have as low a GRM as possible. Keep in mind that the GRM is also how many years it would take to pay for the purchase price of the property. 'Make sense why it's important?
While in Denver a GRM of 12 or less is good and expected, it may not be possible to achieve quite as low a number in Pagosa. By raising the rental amount monthly to $1,400 on our example of a home valued at $250,000 we lower our GRM to 14.88. Now less than 15 GRM, we are getting a better return, which in Pagosa would be acceptable. Once the GRM rises over 15, the return on the investment property in Pagosa Springs may be lacking.
Next time we will talk about CAP rate and Net Operating Income.
Robbie Pepper
CCIM, GRI, CNE, e-PRO
PO BOX 900
Pagosa Springs, CO 81147
robbie@frontier.net
970-946-2352 cell
970-731-8599 office
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