Price of building/Total gross rent for one year = Gross Rent Multiplier.

GRM is a quick and dirty method to value a building. Lower numbers equate to stronger cash flow. There is a crude relationship to market capitalization rate, which a bank will use, but GRM doesn't consider the details (such as cost of utilities, and likely vacancy factor) but only compares rents to purchase price.

Roughly speaking, GRM < 3.5 is slum valuation (or a very good deal on a non-slum building).

3.5 < GRM < 6 is a fairly low class neighborhood, or a building in a state of disrepair in a decent neighborhood.

6 < GRM < 7 is a decent building in a decent neighborhood. Working class neighborhood, nominal vacancy factor.

7 < GRM < 8 is getting a tad pricey; moderately upscale neighborhood, low vacancy factor. Tenants include some professionals.

8 < GRM < 9.5 high priced neighborhood. High rents, hopefully low vacancy factor, high growth. Easy to achieve a negative cash flow with this kind of building; the plan is to get capital appreciation in a high growth area.

9.5 < GRM Boom area. Sucker bait, IMO. Negative cash flow virtually assured, with the expectation of high capital appreciation. The risk is that the boom will bust (which happens periodically in real estate).

About the Author: Jim Locker is a technical guy who has done a lot of real estate investing and landlording. The experiences he writes about and advice he gives are either first hand, or in answer to specific questions posed by others. He is commonly known as jiml8 around the internet.