The gross income multiplier (GIM) is a fast and easy way to estimate the value of an income producing property.
It should only be used as a first very basic reference, because it does not take into consideration the property's operating expenses.
Using the formula, you can quickly rank potential investment properties according to value. You can also use this tool to estimate the value of similar properties in the same area. The GIM gives you a quick look at whether a property will remain profitable as conditions change.
Let's take a deeper look at how beneficial the gross income multiplier really is.
What Is the Gross Income Multiplier?
Using the gross income multiplier, you can compare annual rental income to a property’s fair market value.
It’s vital that you understand that the GIM is not a substitute for in-depth research. It doesn’t include operating expenses, so it will not be completely accurate.
The formula is simply a way to estimate a rental property value at a glance. With the gross income multiplier results, you can decide whether you want to do more research or pass on a deal.
Imagine that you’re researching properties in the area where you want to invest. You can use the formula to easily figure out the gross income multiplier of various homes on the market.
You can also use the gross income multiplier to determine fair market value based on the GIM or gross rent of comparable properties. Or, you can figure out the appropriate gross rent for your property, based on the purchase price and market GIM.
To assess the fair market value of a property, you must know the GIM for comparable properties in the same market.
What Can the Gross Income Multiplier Do for Me?
Real estate investors use the gross income multiplier for several reasons. First, the information to calculate the GIM is easily available.
Second, it’s simple to do the calculation.
Lastly, it saves a great amount of time by allowing investors to screen out potential bad deals quickly.
As a result, this calculation has more meaning than property price, cost per square foot, or price per unit.
Find the Gross Annual Rental Income
In order to calculate the gross income multiplier, you must know the property's gross income.
To figure this out, you multiply the number of square feet by the rental rate per square foot. If the property is vacated, you must know the projected rent.
Determine the Property Price
For a listed property, you will use the asking price as the property price.
In order to compare other properties, it may take a little more effort to track down the property price.
An easy way to find the sale's price of a property is to check on sites like Zillow or Redfin. If a sale's price isn't listed on any sites, you can contact a local real estate agent for help.
If you are still unable to track down the sale price, you may need to take a trip to the county records office and perform a title search.
The Gross Income Multiplier Formula
Once you've determined the gross annual rental income and the property price, you are ready to calculate the GIM. The formula for the gross income multiplier is simple:
Property Price / Gross Annual Rental Income = Gross Income Multiplier
Here's an example of how to use the formula. Imagine that you’re assessing a rental property that costs $600,000. The property might generate $55,000 in gross annual rent.
In that case, the GIM would be 600,000 divided by 55,000 which equals a GIM of 10.9. In other words, the asking price is about 11 times the annual rental income.
The GIM is a comparative assessment. If the GIM is way too high or too low for comparable sales in the area, there is probably something wrong with the property.
It’s a good way to make a quick assessment of potential profit. It can also help you make a basic estimate of how fast you might pay the property off using gross rent.
However, you’ll have to do further research to determine a more realistic picture of your net operating income. In the real world, you’d have additional expenses, such as routine repairs. You must also consider the cost of vacancies as you turn over units. Furthermore, you’ll need to assess property taxes and insurance.
Using the Formula to Calculate Property Value
Once you find the gross income multiplier of several properties in the area, you can use an average GIM to find the estimated property value of a property you are considering.
You can find an average GIM by adding all of the GIMs of similar properties in the area, and dividing by the number of properties.
Let's say the average GIM is 8.5, and you are considering a property with a rental income of $72,000.
GIM (8.5) x Annual Rental Income ($72,000) = Property Value ($612,000)
So you would look at the asking price of your property, and if it is similar to this calculation, you know it is appropriate for the area.
GIM vs. the 1% Rule
The 1% rule is another fast and easy tool to assess investment opportunities. Like the gross income multiplier, you use it to determine whether an investment property will perform at a decent level.
The purpose of the rule is to ensure that the rent would likely produce a positive monthly cash flow after all average expenses.
To do the math for the 1% rule, you’d multiply the purchase price of the property by 1%.
Purchase Price x .01 = Base Level of Monthly Rent
Overall what it's telling you is if a house costs 100K, you want to be able to charge at least 1k per month in rent. And conversely, if a house can only get 1K per month in rent, you don't want to pay more than 100K for the house.
But again, it's just a basic starting metric. Its not considering all the expenses which can vary on a percentage basic by locality, and a variety of other factors.
PRO TIP: If you are buying turnkey rentals, I think you should abide by a 1.25% rule. So if a house garners 1K per moth in rent, you want to be paying about 80K for it. Just because of the extra expenses management brings.
Get the Most Out of Your Property Portfolio
Now that you know more about the benefits of the gross income multiplier, you have a great way to make first glance assessments of potential rental properties.
But real estate investing is complex. Even with experience, the field has its challenges.