Gross rent multiplier vs cap rate: what GRM tells you and where it lies

The GRM formula, yearly and monthly

Yearly GRM = purchase price ÷ yearly gross rent. This is the version most investors and listing sheets use. A $640,000 fourplex that brings in $69,600 a year in scheduled rent has a GRM of about 9.2.

Monthly GRM = sale price ÷ gross monthly rent. Appraisers use this one. Fannie Mae's Form 1025, the appraisal report for 2 to 4 unit properties, lists each comparable sale's gross monthly rent and its gross rent multiplier, then multiplies the subject's total gross monthly rent by the GRM the appraiser settles on to get the value by the income approach. The same fourplex is $640,000 ÷ $5,800, a monthly GRM of about 110.

They are the same measure. Monthly GRM is twelve times the yearly one. If an appraisal shows a GRM of 110 and you were expecting 9, nobody made a mistake. Check which one you are reading before you compare numbers.

Going the other way, value = GRM × gross rent. If similar buildings have been selling at 9.0 to 9.6 times yearly rent, $69,600 of rent points to roughly $626,400 to $668,160. That is a range to start from, not a price.

How GRM and cap rate connect

Here is the link most articles skip. If expenses are a share of gross rent, call it the expense ratio, then NOI = gross rent × (1 − expense ratio). Divide both sides by price and you get cap rate = (1 − expense ratio) ÷ GRM.

So a GRM is a cap rate with the expenses hidden. At a GRM of 9.2, a building that spends 37% of its rent on operating costs is about a 6.9% cap. One that spends 59% is about a 4.4% cap. Same GRM, very different deal.

This is also why the old shortcut of assuming half the rent goes to expenses only gets you close. At a 50% expense ratio, a yearly GRM of 10 means about a 5% cap. If the real ratio is 35% or 60%, the cap rate is 6.5% or 4%.

The 1% rule is a GRM in disguise. Rent equal to 1% of price each month is a monthly GRM of 100, or a yearly GRM of about 8.33. It has the same blind spot: it says nothing about what the property costs to run.

Example

Illustrative example. These are made-up numbers to show the math, not real listings or market averages. Two fourplexes on the same street are each listed at $640,000. Each has four units at $1,450 a month, so $5,800 a month and $69,600 a year. Both have a yearly GRM of about 9.2 and a monthly GRM of about 110. On GRM alone they are the same deal.

Building A. Tenants pay their own gas and electric, and the roof and boiler are newer. Vacancy at 5% is $3,480, taxes $7,400, insurance $3,600, repairs and reserves at 8% of rent $5,568, and management at 8% of rent $5,568. Operating expenses total $25,616, an expense ratio of about 36.8%. NOI is $43,984 and the cap rate at list price is about 6.9%.

Building B. One old boiler heats all four units, the owner pays water, sewer, and trash, and the reassessed tax bill is higher. Vacancy is the same $3,480 and management the same $5,568, but taxes are $9,800, insurance $4,400, owner-paid utilities $9,600, and repairs and reserves at 12% of rent $8,352. Operating expenses total $41,200, an expense ratio of about 59.2%. NOI is $28,400 and the cap rate at list price is about 4.4%.

What each is worth to you. Say you need a 6.75% cap on this kind of building. Building A supports about $651,600 ($43,984 ÷ 0.0675), about $11,600 above asking. Building B supports about $420,700 ($28,400 ÷ 0.0675), roughly $219,000 under asking. Same rent, same GRM, same street. One is fairly priced and the other is listed at about 52% above what its income supports.

Check the formula. Building A: (1 − 0.368) ÷ 9.2 ≈ 6.9%. Building B: (1 − 0.592) ÷ 9.2 ≈ 4.4%. The cap rate gap is entirely the expense gap, which GRM cannot see.

When GRM is the right tool

Sorting a stack of listings. If you have forty small multifamily listings and an hour, GRM is how you pick the eight worth pulling expenses on. You only need price and rent, and both are on the listing.

Checking an appraisal or a seller's price on 2 to 4 units. The appraiser's income approach on these properties is built on GRM, so knowing the GRMs of recent nearby sales tells you how the bank is likely to see the value.

Comparing look-alike buildings. Same unit mix, same age, same utility setup, same tax area. Their expense ratios should be close, so GRM differences mean something.

Common pitfalls

Different utility setups. A building where the owner pays heat or water can carry thousands a year more in expenses than one where tenants pay. GRM treats them as identical.

Pro forma rent. A GRM built on what the seller says the rent could be is not the GRM of the building you are buying. Rebuild it from the rent roll and the leases.

Taxes after the sale. In many areas a sale can trigger a reassessment. The seller's tax bill may not be yours, and GRM never shows it either way.

Deferred maintenance. Two buildings at the same GRM, one with a ten-year-old roof and one with a forty-year-old roof, are not the same price. Rehab and reserves belong in the expenses.

Rent levels versus vacancy. Gross rent assumes every unit is rented at the scheduled rent. A building with above-market rents and high turnover can show a good GRM and a poor real income.

Published GRM averages for a ZIP code or city. They are built from whatever rent and price data the publisher had, often asking rents and listing prices. Treat them as background, not as comps for your building.

GRM vs cap rate at a glance

Formula. GRM is price ÷ gross rent. Cap rate is NOI ÷ price.

Inputs. GRM needs price and rent. Cap rate needs price, rent, vacancy, and every operating expense.

Reading it. Lower GRM means you pay less per dollar of rent. Higher cap rate means more NOI per dollar of price.

Debt. Neither one includes the mortgage. For the return on the cash you put in, use cash-on-cash return.

Best use. GRM for screening and for reading small multifamily appraisals. Cap rate for pricing and offers.

Run your own numbers

Start with GRM on the listing, then build NOI. The NOI for cap rate guide walks through which expenses belong in it and which do not. The cap rate calculator divides your NOI by the price, and the multifamily calculator takes rent, vacancy, expenses, and the loan through to cash flow and cash-on-cash return.

These pages run the math on numbers you enter. They do not supply rents, expenses, or market GRMs, and nothing here is an appraisal, a valuation, or financial advice. Verify the rent roll, the tax bill, and the utility setup before you rely on any ratio.

Sources

Fannie Mae Form 1025, Small Residential Income Property Appraisal Report (accessed October 27, 2026), https://singlefamily.fanniemae.com/media/12376/display. The sales comparison grid lists each comparable's gross monthly rent and gross rent multiplier, and the income approach is total gross monthly rent × GRM.

HUD Archives, HOC Reference Guide, Gross Rent Multiplier, page 1-03 (accessed October 27, 2026), https://archives.hud.gov/offices/hsg/sfh/ref/sfhp1-03.cfm. Since January 1, 2006, FHA appraisals on 2 to 4 unit properties use Form 1025, which carries the comparable rental data for the GRM analysis.

J.P. Morgan, What is a gross rent multiplier (GRM)? (accessed October 27, 2026), https://www.jpmorgan.com/insights/real-estate/commercial-term-lending/what-is-a-gross-rent-multiplier-grm. GRM is market value divided by annual gross rent and does not account for operating expenses, while cap rate uses net operating income.

Steps

1. Total the gross rent

   Add up the scheduled rent for every unit for a full year, before vacancy and before any expenses. Use rent the leases support, not the listing's pro forma.

2. Divide the price by the rent

   Price divided by yearly gross rent is the GRM investors quote. Appraisers often divide by monthly rent instead, so a yearly GRM of 9.2 shows up on an appraisal as about 110.

3. Compare it with sold buildings like yours

   Work out the GRM of recent sales with the same unit count, age, and utility setup. A GRM is only useful against buildings that cost about the same to run.

4. Estimate the expense ratio

   Add up vacancy, taxes, insurance, owner-paid utilities, repairs, reserves, and management, then divide by gross rent. That share of the rent never reaches you.

5. Turn GRM into a cap rate

   Cap rate = (1 − expense ratio) ÷ GRM. If two buildings share a GRM but not an expense ratio, the cap rate shows which one is actually cheaper.

6. Price the deal on NOI

   Divide NOI by the cap rate you need to get the price you can pay. Use GRM to sort listings and cap rate to set your offer.

Questions