How is the Gross Rent Multiplier (GRM) calculated and what are its limitations?

The gross rent multiplier equals the purchase price divided by the annual gross rent. A property priced at $300,000 with $24,000 in annual gross rent has a GRM of 12.5. Lower GRMs generally indicate better value. The critical limitation is that GRM completely ignores operating expenses, which can vary dramatically between properties. Two properties with the same GRM but different tax burdens, insurance costs, or maintenance needs will have very different actual returns. GRM is useful only for a very quick initial comparison between similar properties in the same market.