Posted by Ed Garcia on February 03, 2000 at 09:54:07:
Value is the present worth of all rights to future benefits. The right being obtained through
the payments of rents are the use of the physical structure as well as the intangibles
( amenities or satisfaction). Income properties such as large apartments and commercial
stores are purchased for the income stream they produce, whereas single-family homes are
purchased for shelter plus the satisfaction ( amenities of home ownership).
Standard capitalization techniques used for income producing properties do not measure
intangibles such as pride of ownership and other amenities found in home ownership.
The indirect method of capitalization or gross rental multiple will measure the market value
of the combination on intangibles and tangibles found in single family and small income
Gross Rent Multiplier (GRM) by comparing actual rentals and sales prices of properties
Comparable to the subject, to get another indication of value by multiplying the monthly
rent by an appropriate GRM. If a comparable property rents for $700 a month and sells
for $84,000 which is 120 times the gross monthly rental ($84,000 divided by $700=120),
then the indicated |GRM applicable to the subject property is 120, plus or minus adjustments
for deficiencies in or greater benefits from the subject property. GRM is the ratio between
rental income of a property and it’s sale price.
Method of approach in using the Gross Rent Multiplier
A. Determine the fair or economic rent of the subject being a appraised by comparison
with similar rental properties.
B. the gross rent multipliers of the sales one investigates are calculated by dividing the
sales price by the monthly rents.
C. The rent multipliers may then be tabulated showing how these properties varied
From the subject-better or poorer.
D. The rent multipliers are not averaged to arrive at one final multiplier,
Each property and it’s multiplier is compared to the subject as to the fair
rent obtainable, location of property, size, condition, and utility of the
house, and the amenities to be desired.
After proper analysis, one rent multiplier should be obtained.
E. The gross rent multiplier selected, multiplied by the fair rental of the subject property
Results in the value estimate by means of the Income Approach.
Lenders and appraiser may calculate a GRM by using annual rents instead of monthly.
For example: the gross income from an unfurnished apartment building is $200,000 per annum.
If an appraiser uses a gross multiplier of 7% then it is said that based on the gross multiplier the
Value of the building is $1,400,000.
Hope this helps,