What makes a good investment? Unfortunately, there is not one definitive answer. What might be a good investment for one person might not be a great investment for someone else, but thankfully there are some general guidelines that can help you make informed decisions about your investments.

In Episode #72: Cap Rates vs. GRMs of the Investing with GoodLife podcast, Rohan and David compare Cap Rates and Gross Rent Multipliers (GRM). They discuss the pros and cons of each and deliver a general understanding of what GRMs are. Read on to learn more or you can listen to the episode using the following link. Investing with GoodLife is available on all major podcast

What is GRM?
GRM or Gross Rent Multiplier is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses, such as property taxes, insurance, utilities, Etc. GRM is the number of years the property would take to pay itself in gross received rent.

How Do you Calculate the GRM of a Property?
To calculate the GRM of a property, you divide the price of the property by its gross rental income.

Difference Between Cap Rates & GRM
The major difference between Cap Rates and GRM is that the GRM uses the gross income of the property, while Cap Rates use the Net Operating Income (NOI) of the property.

Pros of GRM
The biggest pro of using the Gross Rent Multiplier is how easy the metric is to use which allows you to calculate quickly. The GRM is quite effective since it allows you to easily compare potential investments and eliminate properties before performing in-depth analyses.

Cons of GRM
A con of using the GRM is that it only focuses on rental revenue and excludes other revenues that can be generated from a rental property. Another downside of GRM is that it doesn’t consider vacancies or other expenses, such as property taxes, general operating expenses, maintaining common areas, roof maintenance, etc. Since none of those are considered in this metric, it contrasts to Cap Rates as Cap Rates are based on NOI, and Net Operating Income is defined as revenues minus expenses.