If you're an investor, then it's likely that you've heard your real estate agent mentioning the Gross Rent Multiplier, GRM. It is a term used to describe how a landlord can increase rent each year without having to go through the city council again. This tool is also used for calculating how much revenue a service provider has before expenses and for investors who are considering launching an online business or service.
The Gross Rent multiplier is calculated by dividing the average gross lease rate (the number of months per thousand square feet) by twelve. So if we have an average lease rate of 12 months per thousand square feet, then our gross rent multiplier would be 0%. That means that the landlord is not allowed to increase the rent by 1 unit each year. The gross rent multiplier can also be calculated through the following formula:
GRM = Average lease rate per month/ 12 months per thousand square feet.
The gross rent multiplier is used for monthly leases and it's important to remember that you cannot add costs like commissions or taxes to it when calculating this number. In order to know how much a landlord can change the rent, we must find out what the current gross lease rate is. The easiest way to do this is to get the lease between the landlord and their tenants, and then divide it by twelve. Once we have this number, we can then apply the gross rent multiplier formula to it.
Let's take an example. If a landlord has a ten-year lease with 1000 square feet per unit (ten units x 100 square feet). The gross rent multiplier would be 0% because there's no way for the landlord to increase the rent by 1 unit each year without going through the city council at least once every ten years.
It is important to note that if you're only leasing out space on your property (landlord), you are not required by law to provide any form of the reserve for your tenants.
If the lease rate is 18 months per thousand square feet, then our gross rent multiplier would be 0.18. This landlord can apply an increase of 1 unit each year when it comes to renting. The average gross lease rate in Canada is about 22-23 months per thousand square feet. That means that the gross rent multiplier can be 0.22-0.23, which means that he/she can raise the rent by 2 units each year without having to go through the city council for approval. If the landlord's average gross lease rate is 30 months per thousand square feet, then the gross rent multiplier can be 0.30. The landlord could raise the rent by 3 units per year without having to go through the city council.
Some landlords might only have one-year leases, which means that they can apply for an increase of 4 units each year if their average gross lease rate is 30 months per thousand square feet. Tenants that are on a month-to-month lease can have their rents increased in the same way.
There are some landlords who have a well-kept property in a good location where the average lease rate is 30 months per thousand square feet. In a city like Toronto for example, rents can go up by 4-5 units each year in this case. This is because there are not enough rental units for tenants. If the landlord raises the rent by that amount, then all of his/her potential tenants will be able to afford it. Whereas if he/she raised it by only 1 unit each year, there will be a few people who would be priced out of renting the unit.
According to an article written by Alex Avery in 2006, estate agents have lower gross lease rates when compared to their market value prices. If an estate agent is selling a house with a $1,000,000 value and the gross lease rate is 1% (100 months per thousand square feet), then the agent could charge only a $10,000 gross rent on the property. If the gross lease rate is 2% (200 months per thousand square feet), then he/she could charge $20,000 gross rent on the property. But if the gross lease rate is 4% (400 months per thousand square ft. ), then he/she could charge $40,000 on your property.
The reason why some agents have lower gross lease rates than their market values is that the landlord will only pay them a fraction of the market value when they sell. The agent will not get the full $10,000 gross rent in these cases.
A landlord can also increase the amount of his/her property taxes each year for his/her tenants. Usually, he/she can increase it by 1% or 2% each year, which equals between $200 to $400 per year on a property with an average of 5 years left on it.
Another thing that a landlord can do to increase the rent without going through the city council is box lighting. Landlords can add this to their properties, which will allow them to ask for more in rent each year. This is simply because box lighting actually means an easier lifestyle for tenants and if they don't, then they might have a hard time renting out their units.
Some landlords might only use the gross rent multiplier formula while others might use it along with the above-mentioned ways to increase their property's income. The important thing is to keep your tenants happy and comply with all of the laws in place.
Gross Rent Multiplier Definition:
The amount by which a property's monthly rent can be increased over time. Just like you might have to get permission from your landlord each year to increase the rent by 1% or 2%, you also have to get their consent before you can increase your property's rents further. To find out how much a landlord can increase the rental rates, calculate what the lease rate is right now. Then multiply it by twelve (120 months per lease) and divide it by twelve (12 months per lease). You will have this number written down somewhere in your paperwork as well. The landlord cannot increase the rent by more than the gross rent multiplier each month.
Also see Price to Rent Ratio For Your Investment Property, Gross Lease Multiplier (GRM) For Calculating Rents, and Price to Rent Ratio Formula.
The Gross Rent Multiplier Formula: (Average lease rates per year) x 12 months = Gross lease multiplier (per month). Add this number to the average purchase price of a rental property in your area.
Example of The Gross Rent Multiplier Formula: ($20 per year) x 12 months = Price that the landlord can increase his/her rent by next year without going through city council for approval ($240 yearly).
Gross Rent Multiplier, GRM Step By Step:
Step 1: Find out what the gross lease rate is now by multiplying the average lease rates per year by 12 (12 months per lease). If the average gross lease rate is $20 per year, then multiply it by 12 and divide by 12. This will give you a number of how many units you can add to your rent each year. In this example, a landlord can increase his/her rent by 1 unit next year if he/she wants to do so without going through the city council for approval. ($20 x12/12 = $0.18)
Step 2: Now find the purchase price of a property like this in your area. If there are no apartments or condos in your area, then search out the purchase prices of houses. If you live in a city like Toronto for example, then you can check out some real estate websites and find some information about what houses sell for in your area. Then divide their value by one-thousand (1,000) to get the average price per square foot. If you have 2,000 square feet in a property and the average price per square foot is $200, then you will have an average purchase price of $400,000.
Step 3: Add these together to get your gross rent multiplier. In this example, it will be ($20 x12/12 = $0.18) + $400 thousand = $18.00
This is the highest amount that a landlord can increase the rent on a monthly basis without having to go through the city council for approval. If his/her tenants are paying less than this amount, then he/she can just increase it by 1 unit each year and they will eventually be paying this amount in rent.
It is possible for tenants to get charged more than this amount if they are living in a house or apartment building with box lighting or other amenities. Then their landlord can charge them more each month because he/she has added an improvement to their property that he could have otherwise rented out for more.
For more information, you can visit Real Estate Calculators.
