A gross rent multiplier (GRM) is a simple way to create a number to give you an estimate on the viability of an investment property.
The formula for GRM is simple. You just need the purchase price or market value and then divide that by the gross scheduled income. For duplexes, the second formula is another way to look at the calculation:
Gross Rent Multiplier (GRM) = Property Value / Gross Scheduled Income
Duplex GRM = Property Value / (GSI of Unit 1 + GSI of Unit 2)
This gives you a ratio between value and income. A smaller number indicates a better investment opportunity since it means the property would pay for itself in a shorter amount of years.
If you want to determine the Monthly Gross Rent Multiplier, simply multiply the yearly GRM by 12.
If a duplex has a value of 240k, and one side is renting at $1000 a month and the other side is renting for $1000 a month, you would calculate the following yearly and monthly duplex GRMs.
- $240k (PropertyValue) / ($1,000*12) + ($1,000*12)
- $240k (PropertyValue) / ($24k)
- $240k (PropertyValue) / ($24k) = 10 GRM
10 Years of collecting 24k = $240k
Monthly GRM = 12*10 or 120
120 Months of collecting $2000 = $240,000
The GRM is a quick and easy metric but very limited. A serious investor would use the GRM as a rule of thumb but would calculate the cap rate to really determine a property’s attractiveness. There are just too many variables left out with GRM to get an accurate measure of investment worthiness.
#1 – Duplex Rentals are usually more affordable.
Duplex rentals are usually more affordable than a single family rental with similar age, condition, beds/baths and square feet.
#2 – Duplex Rentals usually have experienced Property Management.
Many times duplexes are bought to be a rental so there is usually more professional management of these properties. When you deal with a single family home rental, you may or may not be dealing with someone who can properly manage their property as a rental.
#3 – Duplex Rentals have more quality controls than Apartments.
Duplex rentals are better than apartments as you have only one other neighbor. The screening process for the other tenant will probably be more thorough. A property manager screening 500 renters for a complex can only be so thorough per renter application.
#4 – Duplex Rentals provide a home living space.
Duplexes for rent are better than apartments because with an apartment you are isolated to your unit. If you are lucky it may have a nice balcony. The right duplex rental can provide a nice yard for your kids and pets.
#5- Duplex Rentals provide a community environment.
Duplex rentals are in the community. They are part of a neighborhood. Apartments are complexes, with less community interaction. When renting a duplex, you get more than a rental, you get a home with a community.
Any experienced real estate investor will tell you that “things don’t always go as planned”. When buying a duplex as a rental, you must have realistic expectations and a cash flow reserve. Here are some specific questions related to vacancies if you buy a duplex rental:
- How will you advertise to attract tenant inquiries?
- Do you have at least a 6 month cash flow reserve if you have double vacancy?
- At what point will you drop your rental amount if no tenants show interest and what increments will you drop the price?
- Are you willing and able to occupy one side of the duplex for a period of time so that you don’t have double vacancy?
These are some quick questions to ask yourself before you get started, but ultimately it comes down to being a landlord and providing a rental that renters want to rent. That being said sometimes you just need to have some time to find a tenant; just make sure that time doesn’t stretch your bank account too thin.