Capitalization rateCap rate
The ratio of a property's annual net operating income to its price or value; it converts a stream of income into a lump-sum value.
Glossary
Gross rent multiplierGRM
A property's price divided by its annual gross rent; a quick, rough valuation shortcut that ignores vacancy and operating expenses.
The gross rent multiplier is the number of years of gross rent it would take to equal a building's price. It is a back-of-envelope screen: an investor can compare buildings quickly without a full income statement. Because it uses gross rent rather than net operating income, it says nothing about how expensive a building is to run, which is why it is a starting point rather than a conclusion.
Gross rent multiplier
GRM = price (or total cost) ÷ annual gross rentAssume a total development cost of $24,000,000 and gross potential rent of $2,580,000 per year. GRM = 9.3. A building with a higher multiplier is more expensive relative to the rent it collects.
Two buildings with the same GRM can be very different investments if one has high property taxes or an old boiler. The cap rate, which works from income after expenses, corrects for that and is the measure professionals rely on. GRM survives because it is simple and because for buildings with similar expense profiles it tracks value reasonably well.
For readers thinking about housing costs, the GRM is a useful way to see how much building a dollar of rent supports. Under our illustrative assumptions, about 9.3 years of gross rent pays for the building once. That ratio rises when construction costs rise faster than rents, and it falls when cheap financing lets buyers pay more for the same income stream.