Cap rate vs gross rent multiplier (GRM)
GRM is price divided by annual gross rent. It ignores every expense, which makes it fast and shallow. Cap rate uses NOI, so it accounts for taxes, insurance, management and maintenance. GRM screens; cap rate decides.
Side by side
| Cap rate | GRM | |
|---|---|---|
| Formula | NOI ÷ property value | Purchase price ÷ annual gross rent |
| Includes | Vacancy and all operating expenses. | Nothing but gross rent. A multiple, not a rate. |
| Use it for | Valuing a property and comparing to comps. | Screening a list quickly before you underwrite. |
Why the difference matters
Two buildings at the same GRM can have very different cap rates, because the expense ratio is what separates them. An old fourplex with owner-paid water and a new build with tenant-paid utilities can screen identically and perform nothing alike.
The mistake to avoid
Quoting GRM as if it were a rate. It is a multiple: a lower GRM is cheaper, while a higher cap rate is cheaper. They run in opposite directions, and mixing them up inverts your entire shortlist.
Worth knowing
- GRM is a multiple. Lower is cheaper.
- Cap rate is a rate. Higher is cheaper — up to the point it becomes a risk signal.
- GRM is genuinely useful for screening dozens of listings in an afternoon.
- The expense ratio — operating expenses ÷ effective gross income — is the bridge between them.