Real Estate Investors – What the Heck Is A GRM?

As in any profession or industry, investment real estate has its own nomenclature — our own language so to speak. Many of the words/concepts we use have been reduced to abbreviations. An example is NOI — Net Operating Income. The one we’ll talk about today is GRM — Gross Rent Multiplier. For those of us who’ve been in the business since Hector’s pup died, it gets even shorter, often referred to as Times Gross — as in “How many times gross do properties sell for in this town?”

First thing we should do is lay out what Gross Rent even means. It refers to the gross scheduled rent of a given property, which will also generally include laundry income if applicable. It should be understood that it’s virtually universal that you’ll be referring to a year’s income — not a month’s. I say that, but there are places that will use monthly income, a pain in the rear end if there ever was one. Numbers are almost always computed using annual figures when producing an analysis on residential income properties. That’s not to say using monthly figures won’t work, but it’s a lot more work than necessary.

A San Diego duplex might have gross annual income of $25,000, which, when multiplied by say, 13, would result in a ‘value’ of $325,000. We’d say that property had an asking price of 13 X Gross. In Texas, that same property would sell for something like 8-9 X Gross if it was new or newer.

Like everything else in real estate, knowing if you’re comparing apples to apples is a big help — an abuse of understatement for sure. Using GRM to compare various investments is like choosing a wife from a catalogue — don’t do it if you can avoid it.

See, GRMs are often lies, wrapped in half truths, tied with a bow made of the erroneous inferences of the investor/analyst.

Experienced real estate investors don’t buy properties based on the GRM — period, not ever, end of sentence, amen. Why? Simple — two props can have the same annual rent, but entirely different expense numbers. Wouldn’t you rather pay for net income rather than gross? Hollywood has been puttin’ the screws to naive actors for decades, by offering them a percentage of the gross.

Income property is all about the NOI — NOT the gross.

But let’s assume you’re comparing two almost clone-like properties, a block or two apart. Using GRM will give you a decent apples to apples idea of which one is the better buy. UNLESS, that is, you discover one is paying to heat the water in all four units of the fourplex, while the other sports separate water heaters for each unit, with tenants paying to heat their own water. If you’re unaware of that little factoid, you’ll assign roughly the same value to each, when nothing could be further from the truth. How much does that matter?

Let’s arbitrarily say it takes $15/month/unit to heat water for owner-paid property. That’s $720 a year directly off your NOI. If the Capitalization Rate is 8%, that means by definition that fourplex is worth roughly $9,000 less than the other one. But wait, it gets worse.

If your Plan called for applying some/all of your cash flow to reducing your loan’s balance, that’s $720 a year that will still be taking interest outa your pocket. Each year it’s another $720, adding insult to injury. How much does that matter? Well, over time it can make a discernible impact. Let’s take a look.

That lousy ‘little’ $15 a month per unit to heat water means that over a five year period your loan balance will be over $4,100 higher than it could’ve been. Just $15.

Over time, and multiplied over several properties, that one little analytical mistake could literally cost you an entire property you won’t be acquiring when you decide to exchange up. The equity simply won’t be there. But you’ll feel good cuz you’ll know your tenants showered with hot water, right?

Region to region, GRMs will vary wildly to say the least. For example, I’ll be speaking with San Diego duplex owners who’ll be asking somebody to invest anywhere from $325-450,000 for their two units. (Not my clients, mind you.) If it’s offered at $400,000 with an annual gross income of $30,000, the GRM would then be 13.34. (13.34 X $30,000)

Compare that to a duplex in Texas which is new, not 50+ years old, has the same income, same quality of location, yet sells for just over $250,000. Which one do you wanna own? Don’t answer, it’s a rhetorical question. That’s why, in a nutshell, you won’t see me representing buyers trying to acquire San Diego income property. It just doesn’t make sense when compared to other regions. Besides, I hafta sleep too.

Using the GRM of a property to assess its value is playing with fire. Any analysis limited to that approach should be seen as a rule of thumb at best, and a sucker bet at worst. It’s a lie from the start, especially when used in comparative analysis. Bottom line? If you’re serious about arriving at any kind of a credibly reliable value, DO NOT use this approach.

The current atmosphere is often confusing enough without going out of your way to muddy the waters even more. The sad thing is, there are far too many ‘real estate investors’ using this method of valuation in their decision making process. It’s one of the quickest ways I know to buying a pig in a poke.

Put more clearly — GRM is for wannabes and amateurs, and the pros know this.

Thanks to one of my favorite readers, ‘AI”, for her suggestion I write on this topic. She knows all about this stuff — how to use it, and it’s pitfalls.

Lookin’ to get out of your own version of Dodge City? Gimme a call so we can cuss and discuss your particulars. I’m at 619 889-7100. Have a good one.

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4. Why Are Real Estate Investors Leaving San Diego?
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