Gross Rent Multiplier (GRM)

Gross rent multiplier is purchase price divided by annual gross rent. It is the gross-income counterpart of cap rate: cap rate uses net operating income, GRM uses rent before any expense. A $500,000 property renting for $50,000 a year has a GRM of 10 and, under typical expenses, a cap rate near 6.1%.

The two are linked by the expense ratio. Cap rate is roughly (1 minus vacancy) times (1 minus expense ratio) divided by GRM. With 5% vacancy and 36% expenses, cap rate is about 0.61 divided by GRM. Change the expense ratio and the same GRM maps to a different cap rate.

GRM is faster because rent and price are on every listing and expenses are not. It fails whenever expenses differ between the properties being compared: HOA dues, property tax rates, insurance and owner-paid utilities all move the cap rate while leaving the GRM unchanged. Use GRM to sort a list of listings and cap rate to underwrite the survivors.

Further reading: Gross Rent Multiplier (GRM) on Wikipedia.