The GRM is simpler than the full income capitalization approach because it uses gross rent rather than net operating income and does not account for operating expenses. To calculate GRM: GRM = Sale Price / Gross Rent. To estimate value: Value = Gross Rent x GRM. A lower GRM generally indicates a better investment.
A comparable duplex sold for $240,000 and generates $2,000 per month in gross rent. GRM = $240,000 / $2,000 = 120. If a similar duplex generates $2,200/month, its estimated value is $2,200 x 120 = $264,000.
Memorize both formulas: GRM = Sale Price / Gross Rent and Value = Gross Rent x GRM. Remember that GRM uses gross rent (not net income) and does not account for expenses. Be careful whether the question uses monthly or annual rent.
Related Terms
Related Concepts
Converting a percentage to a decimal involves dividing the percentage value by 100.
IRV stands for Income, Rate, and Value. It represents the relationship between Net Operating Income (I), Capitalization Rate (R), and Property Value (V).
Net Operating Income (NOI) is the revenue a property generates after deducting all operating expenses.
The capitalization rate (cap rate) is the ratio of a property's net operating income to its sale price, expressed as a percentage. It is used to estimate value and compare profitability of investment properties. Cap Rate = NOI / Value.
Net operating income (NOI) is the annual income generated by an income-producing property after deducting operating expenses, but before deducting mortgage payments, income taxes, and depreciation.
Frequently Asked Questions
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