What is a Good Gross Rent Multiplier for Buildings in Westside LA?
Gross Rent Multiplier or GRM is one of many ways to calculate the value of a building to assess whether or not it might be worth an investment. It’s a key part of due diligence, and something to take into account in addition to cap rate, comps, NOI, and more. Let’s talk about what a Gross Rent Multiplier is, what it can help you determine, and what a good Gross Rent Multiplier rate in Westside LA might look like:
What is Gross Rent Multiplier (GRM)?
Gross Rent Multiplier is the ratio of your investment in a piece of real estate compared to that building’s gross rental income. It's meant to show a property investor roughly how long it will take for an investment property to pay for itself. In general, the lower a GRM value is, the better the investment, as it indicates a shorter pay-off time.
How to Calculate GRM
The GRM calculation is fairly simple. At its most basic:
GRM = Property Price ÷ Gross Annual Rental Income
To calculate GRM, you'll start with the purchase price of the property, as well as the building's estimated annual rental income. Divide that purchase price by the gross annual rental income to get GRM.
GRM represents (very roughly) the number of years in which you can expect that building to pay for itself.
The limitation here is that you are only looking at one side of the coin. Rents are the major revenue, but expenses and debt costs make a huge impact on profitability too.
So What is a Good GRM for Westside LA?
Across the US, real estate investors estimate that a GRM between 4-7 is generally considered to be healthy. But, as mentioned above, GRM varies so widely by market that it's better to look at GRM for your specific market.
In Westside LA, a good GRM would be around 8, though depending on the local market, higher GRMs aren't uncommon. Remember that this number is variable and constantly changing. So, at the time we've posted this blog, 8 might be a great GRM for Westside LA commercial properties, but a few months from now, depending on where the market is, a good GRM could be much higher or lower.
Is GRM Enough to Consider When Making an Investment Decision?
In short, no. GRM is a great, fast tool to help you immediately gauge the rough potential of a commercial property, but does not offer sufficient information to make an investment decision. Confidently calculating the value of any commercial property takes extensive research, local market knowledge, and expert analysis. That's why the real estate purchasing process includes ample time for exhaustive due diligence — so you can gain as much information as possible to make a comprehensive assessment of a commercial building.
At RENDR, we believe that information is the ultimate hedge against risk. While GRM is one tool in your toolbox, it’s important to take due diligence seriously before investing. If you are looking for good investment properties in the Westside LA area and you’re not sure where to start with market analysis, we can help. Just get in touch with our team.