A gross rent multiplier is the purchase price divided by a year of rent. That is the entire calculation.
A $250,000 house renting for $2,750 a month collects $33,000 over a year. Divide $250,000 by $33,000 and the multiplier is 7.6. At today’s rent, the price is worth about seven and a half years of it.
What does the multiplier actually measure?
It measures price against gross rent, and “gross” is doing a lot of work in that phrase. The rent in the formula is the rent on the lease, before a month of vacancy, before the tax bill, before the insurance premium, before a water heater fails.
So the multiplier tells you what you are paying per dollar of rent collected. It tells you nothing about what you keep.
That is a fair trade for how fast it is. You can work it out on a listing page from two numbers that are already printed there, which is more than most measures can claim.
What is a good gross rent multiplier?
Lower is cheaper. A 6 means you are paying six years of rent for the building, an 11 means eleven, and between two houses that cost the same to run, the lower number is the better buy.
The catch is that last clause. Houses do not cost the same to run. A multiplier has no opinion about a county that charges twice the property tax, or a roof that is nineteen years old, or a market where a vacancy takes eleven weeks to fill. So there is no threshold that makes a deal good, and a multiplier from one city tells you very little about a house in another.
Compare multipliers between properties that are alike: same area, same size, same condition, same kind of tenant. Then stop and look at the costs.
Two houses where the cheaper multiplier is the worse deal
House A is the $250,000 house above, renting for $2,750, with $3,000 of property tax and $1,400 of insurance a year, 5% vacancy, and 5% of rent each for repairs and a reserve for big-ticket items, plus 8% for a property manager.
House B is cheaper and rents for nearly as much: $210,000 at $2,600 a month. It sits in a higher-tax county at $6,600 a year, the insurance quote came back at $3,400, and it takes longer to fill, so vacancy is 8%. Everything else matches House A.
| House A | House B | |
|---|---|---|
| Rent for the year | $33,000 | $31,200 |
| Empty time (5% and 8%) | −$1,650 | −$2,496 |
| Property taxes | −$3,000 | −$6,600 |
| Insurance | −$1,400 | −$3,400 |
| Repairs (5% of rent) | −$1,650 | −$1,560 |
| CapEx reserve (5% of rent) | −$1,650 | −$1,560 |
| Property management (8% of rent) | −$2,640 | −$2,496 |
| Net operating income | $21,010 | $13,088 |
These are example figures, not a forecast for any market.
House B collects 95% of House A’s rent for 84% of the price, and keeps $7,922 a year less. Put the two measures side by side and they point in opposite directions.
| House A | House B | |
|---|---|---|
| Price | $250,000 | $210,000 |
| Rent for the year | $33,000 | $31,200 |
| Gross rent multiplier | 7.6 | 6.7 |
| Net operating income | $21,010 | $13,088 |
| Cap rate | 8.4% | 6.2% |
| Cash flow each month | +$420 | −$27 |
Both houses use the same loan: 20% down on a 30-year mortgage at 7%. House A pays you $420 a month. House B takes $27 a month out of your pocket, and it is the one with the better multiplier.
Gross rent multiplier or cap rate?
They are the same shape of calculation with a different numerator, which is why they can disagree so sharply.
The multiplier divides price by gross rent. A cap rate divides net operating income by price, and net operating income is what the first table above adds up to: rent after vacancy and after every running cost, but before the mortgage. House B’s tax and insurance bills are $5,600 a year heavier than House A’s, and only the cap rate can see them.
Use the multiplier to decide which five listings to open. Use the cap rate to decide which one to make an offer on. If you want the arithmetic behind the net figure first, how to calculate NOI works it line by line.
How is it different from the 1% rule?
The 1% rule is the same comparison upside down and in months. It asks whether monthly rent is at least 1% of the price. The multiplier asks how many years of rent the price equals.
They can even rank a pair of houses identically and still both be wrong. House B’s rent is 1.24% of its price against House A’s 1.10%, so the 1% rule prefers House B too, and House B is the one losing money. Two measures agreeing is not the same as two measures being right, because both are reading the same two numbers.
Where is the multiplier still worth using?
Three jobs, and it is good at all of them.
Sorting a long list, where you need a reason to open one tab and not another. Pricing against comparable sales, because brokers on small buildings quote multipliers and you can value a building the same way. And spotting the outlier: when one listing in a neighborhood sits at a 6 while everything near it sits at a 9, something is different about that house, and it is worth finding out what before you get excited.
The rental calculator does not print a multiplier, because it is two numbers you already have. Type the price and the rent in, divide one by the other yourself, then read the Cap rate and Monthly cash flow it gives you back and see whether they agree.