Welcome back to The Deep Dive. I want to start
today with a visual. Okay. You know that scene,
it's in every high stakes business movie, right?
The one where the seasoned tycoon is sitting
in a diner, maybe a boardroom. Smokey back room.
Exactly. And someone slides this huge thick binder
across the table. It's got hundreds of pages
of due diligence, property inspections, tax records,
everything. But the tycoon, they don't even open
it. Instead, they just ask one question. Maybe
they scribble a single number on the back of
a cocktail napkin. And then they look up and
they say, I'm in. Or the opposite. You're out
of your mind. Or even more dramatically, you're
out of your mind. Exactly. And for the longest
time, I thought that was just, well, I thought
it was lazy screenwriting. The classic Hollywood
trope of the gut feeling. The idea that... You
know, the true experts have some kind of sixth
sense that just cuts through all the paperwork.
Yes. A superpower that you're either born with
or you're not. But I've recently been sort of
wading into the weeds of real estate investing,
just dipping my toes in. I realized something.
What's that? That napkin math isn't a superpower.
It's an actual mechanic. There are specific tools
designed to let you look at a price tag and almost
instantly know if a deal is a total ripoff or,
you know, a potential gold mine. It feels like
magic, but it's really just a ratio. Right. But
it feels like a cheat code. And today we are
talking about one of those specific cheat codes.
It's called the gross rent multiplier. Or GRM
for short. And you're right to call it a cheat
code. but maybe not the way you think a cheat
code in a video game it lets you skip the hard
levels right gross rent multiplier it lets you
skip the noise but and this is the big but we're
going to spend the next hour unpacking if you
use it blindly it can also lead you right off
a cliff that is the mission for today we have
a stack of sources here Technical definitions,
some valuation principles and a few cautionary
tales. And we are going to just completely dissect
the gross rent multiplier. We want to move beyond
just staring at a Zillow listing and seeing a
price that looks like a telephone number. Right.
We want to understand the relationship between
what a building costs and what it actually earns.
And we need to go deeper than just. How to divide
X by Y. I mean, any calculator can do division.
Right. We need to understand the sort of the
psychology of this metric. Why do sellers love
it? Why do buyers get tricked by it? And how
does it stack up against the adult tools in the
room like cap rate and discounted cash flow?
So we're going from the back of the napkin scribble
to the why am I losing money on this duplex?
That is the trajectory, yes. Okay. So let's start
with the absolute basics, but I want to frame
it practically. I'm scrolling through listings.
I see a duplex. It's $500 ,000. Okay. Then I
see another one down the street for $450 ,000.
My brain, my immediate gut reaction says the
$450 ,000 one is cheaper. But that's not necessarily
true, is it? No, not at all. Because you aren't
buying the bricks and the mortar. You're buying
the income stream that comes with it. That $450
,000 building might have tenants who are paying,
you know, 1990s rent prices. The $500 ,000 building
might be fully optimized, getting top market
dollar. So price alone, it's a completely useless
metric. You need a bridge. You need a bridge
between the price and the income. Yeah, exactly.
And that bridge is the gross rent multiplier.
So if I stopped a real estate mogul on the street
assuming they wouldn't call security on you right
assuming that doesn't happen and i asked for
the plain english definition what is it in the
simplest terms the gross rent multiplier is the
ratio of the price of a real estate investment
to its effective gross income okay stop right
there you threw a specific term in immediately
Effective gross income. Now, I know what income
is. That's the rent checks coming in. But why
gross and why effective? That's a key distinction.
It is. This is the first hurdle where people
get tripped up. When we say gross income in the
context of GRM, we're talking about the absolute
top line revenue. We're talking about the money
coming in the door before a single cent goes
out the door. So before I pay the property tax
bill. Yes. Before I pay the insurance policy
for the year. Yep. Before that. Before I pay
the water bill. The trash collection? The guy
who mows the lawn? Before all of that, when you
calculate GRM, you are deliberately, consciously
ignoring operating expenses. Okay, hold on. That
sounds incredibly dangerous. It does. I mean,
if I'm evaluating any other business, I care
about profit. I care about what I actually keep
in my pocket. So if I'm looking at a property
and I explicitly ignore the taxes and the insurance,
isn't that just financial suicide? How can that
possibly be a valid way to value something? It
does sound reckless, doesn't it? Here, buy this
business, but whatever you do, don't look at
the costs. Right. But think about the napkin
scenario you started with. You're at the diner.
You don't have the tax bill in front of you.
You don't have the insurance quote yet. You need
a way to filter the deal now with the limited
information you have. So it's a filter. It's
just a first glance tool. Exactly. But there's
a conceptual way to look at it that makes it
a little less scary. Try thinking of the GRM
not as a measure of profit. But as a measure
of time. Time. How so? Yes. The number you get
when you calculate the GRM, it actually represents
the number of years the property would take to
pay for itself using only the gross received
rent. Okay. Let me try to visualize that. So
I buy a building. I take every single rent check
I receive and I just stack them in a big pile
in the corner. I don't pay the mortgage. I don't
fix the leaky toilet. I don't pay the government
their taxes. I just stack the cash. You just
stack the cash. The GRM is how long it takes
until that stack of cash is the same height as
the purchase price. That is the perfect way to
picture it. It is a raw, unadjusted payback period.
So following that logic, if it's a measure of
time, then faster is obviously better. I want
my money back now, not in 100 years. Precisely.
That is the golden rule of the GRM. For a prospective
investor, a lower GRM represents a better opportunity.
Because it just means fewer years to pay off
the initial investment. Correct. If you see a
listing with a GRM of five and another one with
a GRM of 20, strictly on a payback basis, the
five is paying you back four times faster. But,
and I'm going to play the skeptic here again.
If I see a GRM of five, which sounds amazing,
right, paid off in five years, shouldn't I be
suspicious? You absolutely should. I mean, if
a building can pay for itself in five years,
why on earth is the seller getting rid of it?
Ah, now you are thinking like an investor. A
very low GRM can be a sign of a fantastic deal,
but it is often a sign of a war zone. What do
you mean? It might mean the area is so risky
that investors demand a super fast payback because
they don't know if the building will still be
standing or rentable in 10 years. Ah, so a low
number draws you in, but it might just be a trap.
It's a signal. That's all it is. It's a signal
to look closer. But before we get into all the
traps, and believe me, there are many, we need
to ground this in reality. I want to move away
from the abstract. Let's actually do the math.
Agreed. I need to see the gears turning. I have
a specific example from our source material right
here. And for you, the listener, I want you to
imagine you're standing on the sidewalk. You're
looking at a nice little rental house, white
picket fence, maybe a little garden out front.
Okay, I'm there. The sign in the yard, or maybe
the listing on your phone, says the sale price
is $200 ,000. $200 ,000. Got it. You talk to
the agent, or maybe you peek at the current.
lease agreement that they've provided. And you
see that the current tenant is paying $750 per
month. All right. So we have our two key pieces
of data, the price, which is $200 ,000, and our
monthly rent, $750. Now, my first instinct. My
bad math instinct is to just grab my phone and
divide $200 ,000 by $750. Stop. Do not do that.
Why not? Because you're dividing an apple by
an orange. You're dividing a capital sum, the
total price of the asset, by a monthly flow.
The units don't match up. What happens if I do
it anyway? If you do that, you get, what, $266?
Yeah, $266 .6. A GRM of 266 would imply it takes
266 years to pay off the building. If you see
that number, you're going to run away screaming.
You have to annualize the rent first. GRM is
an annual metric. Okay. Okay. That makes sense.
You have to compare years to years. So step one,
turn the monthly rent into a yearly number. We
take that $750 a month and we multiply it by
12 months. Right. Let's do some mental math.
750 times 10 is 7 ,500. Right. 750 times 2 is
1 ,500. Add them up, you get 9 ,000. So this
little house brings in $9 ,000 a year in gross
rent. Exactly. Now we can do the division. Now
the units match. We take the price, the $200
,000, and divide it by that annual rent, the
$9 ,000. Okay, I'm punching that into my calculator
now. 200 ,000 divided by 9 ,000. And the calculator
gives me 22 .22. There you have it. The GRM for
this property is 22 .22. So let's unpack that
result. 22 .22. In the vacuum of space, that's
just a number. But based on our payback period
definition, this means it takes roughly 22 .2
years of gross rent to cover the purchase price.
Yes, that's the interpretation. I have to be
honest. 22 years feels like a really long time.
I mean, I'll be significantly older in 22 years.
And that's assuming I don't spend a single dime
on repairs. If I actually have to replace the
roof or fix the furnace, it might take 30 years.
It is a significant amount of time. And this
is where market context is everything. In a high
appreciation market like, say, downtown Los Angeles
or Manhattan. A GRM of 22 might actually be considered
normal, maybe even good. Why? Because investors
there aren't just buying for the rent checks.
They're buying because they think the building
will be worth $400 ,000 in five years. They are
banking on appreciation. So a high GRM is often
a signal that people are betting on the property
value itself going up. Or the flip side is it
means this property is just plain overpriced
relative to what it earns today. It can be one
or the other. And conversely. If I'm in, let's
say, a sleepy town in the Midwest where prices
never really change much. Right. A cash flow
market. A GRM of 22 would be terrible. I'd want
something much lower, closer to, what, 8, 10.
In a pure cash flow market, absolutely. You'd
want to see a GRM of 6, 8, maybe 10. You want
that money back fast because you can't count
on the building doubling in value overnight.
So the number 22 .22 isn't inherently good or
bad. It just gives me a benchmark. Exactly. I
can now look at the house next door. If the house
next door is also earning $9 ,000 a year, but
it's selling for only $100 ,000. Then its GRM
is roughly $11 ,000. $100 ,000 divided by $9
,000. And suddenly the $200 ,000 house looks
ridiculous. Exactly. And you didn't need to see
the tax bill or the insurance statement to know
that. You just compared the multipliers. That
is the power of the shortcut. But and there's
always a but with these shortcuts, isn't there?
We touched on a trap a moment ago when I almost
divided by the monthly rent. I want to double
click on that because our source material really
highlights this as a major point of confusion
for new investors. The whole monthly versus annual
trap. This is where rookies get embarrassed or
worse. They make really bad offers. The source
material says that historically and apparently
in some circles, even today, people do, quote.
based on monthly rent. Yes. It's much rarer now
in professional circles, but it absolutely happens.
Sometimes you'll see an old school broker who
just says something like, oh, this place is trading
at 100 times rent. 100 times rent. That sounds
catchy. I'll give them that. It does. But he
means 100 times monthly rent. OK, so let's look
at the math conversion that's provided in the
source. It gives a very specific example. It
says a GRM of 100 calculated on monthly rents
is actually equal to an 8 .33 GRM calculated
on annual rents. Right. Let's break that down
so it's crystal clear. If someone says the GRM
is 100 based on those monthly numbers, they mean
the price is equal to 100 months of rent. Okay,
100 months of rent. Yeah. So how many years is
100 months? You just divide 100 by 12. And that
gets you 8 .333 repeating. Exactly. So if you're
looking at a deal and you see GRM 100 and you
panic, thinking 100 years to pay this thing back.
You've just misunderstood the unit of measurement.
It's actually an 8 .33 year payback, which is
quite good. And the reverse is true, too. If
I see a GRM of 8 .33 on a flyer and I just assume
it must be monthly. You'd think, wow, the house
costs just eight months of rent. I'll take 10
of them. Right. In our example, that would be
an 8 times 750. A $6 ,000 house. Exactly. So
context clues usually save you here. If the number's
up in the hundreds, it's almost certainly a monthly
figure. If it's in the single or low double digits,
it's annual. But the big takeaway is never assume.
Just ask the question, are we talking monthly
or annual? Because the difference is a factor
of 12. And in finance, being off by a factor
of 12 is the difference between retiring early
and going completely bankrupt. Okay, so we've
got the math down. We understand the 22 .22 figure
we know to always use annual rent. But I want
to go back to this uniformity issue. I'm still
stuck on the idea that we're just ignoring all
the expenses. You said earlier that it works
because of uniformity. I need you to convince
me because my skepticism meter is still kind
of redlining on this. Fair enough. Let's try
a different analogy. Imagine you're buying a
used car. You're looking at two absolutely identical
Toyota Camrys. Same year, same mileage, same
condition. They're parked right next to each
other. Okay, I can picture that. Do you need
to calculate the exact cost of gasoline for the
next five years to figure out which car is the
cheaper one to buy? No. Of course not, because
they get the same gas mileage. The gas cost is
going to be the same for both of them. Exactly.
The gas is uniform. So you can safely ignore
it for the comparison and just look at the sticker
price. That is a fundamental argument for using
GRM in real estate. So if I'm looking at two
nearly identical apartment buildings and they're
on the same street. Right. They're in the same
county, so the property tax rate is going to
be the same percentage for both. They were likely
billed around the same time with similar materials,
so the insurance risk is probably pretty similar.
The tenants in that neighborhood, they probably
all pay their own electric bills. So the overall
expense profile is roughly identical between
the two. That's the assumption, exactly. If building
A uses, say, 40 % of its gross income for expenses,
then building B probably uses about 40 % too.
So if you just compare the top line numbers,
the gross income, the ratio holds true. You don't
need to do the heavy lifting of calculating the
net income to know which one is the better relative
value. Okay, that makes sense. It's a relative
tool, not an absolute one. I'm not saying this
is a good deal. I'm saying this is a better deal
than that one. You've got it. It is useful for
comparing properties where those operating expenses
are expected to be uniform. Our source material
lists specific things that we can often consider
uniform. Depreciation effects, periodic costs
like taxes and insurance, and any tenant -incurred
utilities. But what happens when they aren't
uniform? What if I'm comparing a brand new building
with, you know, super efficient HVAC and new
windows to a hundred year old building with a
leaking boiler and drafty single pane windows?
That is where GRM breaks completely and utterly
breaks down. Because the expense profile is totally
different. Wildly different. The old building
might have a great GRM on paper. Maybe it's cheap
and has high rent. But if 60 percent of that
rent is going straight to the gas company to
run that ancient boiler and to pay for constant
repairs, the GRM. is lying to you about its profitability.
So GRM is blind to efficiency. It is blind to
condition. It's blind to the quality of management.
It's blind to everything except for two numbers,
the price and the rent. So why do we use it?
I mean, really, if it's blind to all the things
that actually cost me money, why not just always
use the net income? Why ever bother with GRM?
Because getting the net data is hard. And frankly,
it's often unreliable when you're getting it
from a seller. Is it? I mean, isn't it just on
a spreadsheet somewhere? Think about the seller's
motivation. They want to sell the building for
the highest possible price. Do you think they're
going to proudly advertise that they spent $15
,000 fixing a major sewage backup last year?
Probably not. They'd probably call that a one
-time capital expenditure and try to hide it
or explain it away. Or maybe the owner manages
the building themselves to save money so they
don't list a management fee expense. But you,
the buyer, you live three states away and you're
definitely going to have to hire a manager. Right.
So their net income from last year is going to
be artificially higher than my net income will
be next year. Exactly. Net income is a slippery
number. It depends heavily on who is running
the building and how they account for things.
Ah, but gross rent. But gross rent is usually
a bit more public. You can look on Zillow or
Craigslist to see what similar units are renting
for. You can in theory ask the tenants. It's
a harder number for a seller to completely fudge.
And our source makes this point. Costs like repairs
are often harder to predict than the market rental
return. So GRM serves as an alternative when
a true measure of net investment return is just
too difficult or unreliable to determine. It's
the quick and dirty tool. It's the tool you use
when you don't fully trust the seller's expense
report. Or when you don't have it yet. It's the
scout that goes out ahead of the main army to
survey the terrain. Okay, I like that analogy.
The GRM is the scout. But eventually the army
has to arrive. Eventually you have to look at
the real profit. Yes. And that brings us to the
big rivalry in real estate math. Section five,
GRM versus the cap rate. This is the heavyweight
championship. If you hang around real estate
investors, you will hear the term cap rate 10
times for every one time you hear GRM. Oh, yeah.
What's the cap on that? I'm looking for a six
cap. Sounds very sophisticated. So how does this
relate to our humble little gross rent multiplier?
They're effectively siblings, but one is the
optimist and one is the realist. OK. The GRM,
as we've established, is based on gross rental
income. It ignores all the bad stuff. The cap
rate or capitalization rate is based on net return.
So cap rate does include the expenses. Yes. The
formula for cap rate is the net operating income
or NOI divided by the price. It peels back all
those layers of taxes, insurance and maintenance
to see the real profit yield of the property.
There's also a structural difference. in how
the number is expressed, right? GRM is a multiplier,
a number like 10 or 12. Cap rate is always a
percentage like 5 % or 8%. Right. And this is
another thing that confuses people. One is a
timeline, how many years to pay back. The other
is a yield. What percentage return am I getting
on my money this year? Is there a mathematical
link between them? Or are they just two totally
separate universes of metrics? Oh, they are deeply
connected. In fact, our source points out that
a multiplier derived from net return would be
the multiplicative inverse of the cap rate. Whoa,
okay, multiplicative inverse. You just lost half
the audience with that one. You're going to have
to unpack that without the textbook. Let's try
an analogy. Think of a seesaw. On one side of
the seesaw, you have the cap rate, which is your
return. On the other side, you have the multiplier,
which is the cost in years. Okay, I'm with you.
Seesaw. If the return goes UP, meaning the deal
is more profitable and you're making more money,
what happens to the time it takes to get your
investment back? The time goes down. If I make
more money each year... I get paid back faster.
Exactly. So as the cap rate goes UP, the multiplier
goes down. They always move in opposite directions.
Give me some actual numbers. Okay. Let's say
you have a property with a cap rate of 10%. That
means you are earning 10 % of your initial investment
back every single year in pure profit. Simple
enough. So if you earn 10 % a year, how many
years does it take to get 100 % of your money
back? 10 years. 10 times 10 % is 100%. Exactly.
So a 10 % cap rate is mathematically equivalent
to a net multiplier of 10. Now, what if the cap
rate is only 5 %? Well, if I only make 5 % a
year, it's going to take me twice as long, 20
years to get to 100%. So a 5 % cap rate is a
net multiplier of 20. Do you see the seesaw?
The rate got cut in half from 10 to 5, and the
time doubled. From 10 to 20. That is actually
a really helpful visualization. There's just
two different ways of asking the same fundamental
question. One asks, how much cash do I get this
year? And the other asks, how long until I'm
whole? With the major, major caveat, of course,
that GRM uses the gross numbers and cap rate
uses the net numbers. So they will never match
up perfectly in the real world. Right. But the
relationship holds. If you see a property with
a low GRM, you should expect to see a high cap
rate. If you see a high GRM, you should expect
a low cap rate. And what if you see a low GRM
and a low cap rate? Then the expenses are enormous
and you should run away as fast as you can. Right.
That would mean the building brings in a lot
of rent, but it costs an absolute fortune to
run, so there's no profit left. Precisely. That's
why you have to look at both. The scout reports
back, then the Army does its own analysis. Now,
speaking of looking at the numbers, we need to
talk about where the numbers themselves come
from. Because this brings us to Section 6, variations
on the theme. And this, I think, is where most
people actually lose their money. You're talking
about the data source problem. It's a huge issue.
Yes. First, a quick terminology check. I've seen
the term Jim Gross income multiplier. Is that
different from GRM? Not really. For our purposes,
GRM and GIM are used essentially interchangeably.
Sometimes income in GIM is meant to imply other
sources of income, like laundry money or vending
machines in an apartment building, but usually
it's the same math. Okay, so GIM is fine. We
don't need to worry about that. But the real
danger is the difference between gross potential
rent and effective gross income. This is the
classic used car salesman tactic of real estate.
Explain the difference between those two terms.
Gross potential rent is the fantasy number. It
is the absolute total possible rent you could
collect if every single unit was full, every
tenant was paying the top market rate, and nobody
ever moved out or stopped paying. It assumes
100 percent occupancy, 365 days a year. It's
the in a perfect world number. It is. It's like
a car manufacturer saying this car can get 50
miles per gallon if you only drive it downhill
with a tailwind. Right. So what is effective
gross income? That is reality. That is the actual
rent that was collected and deposited in the
bank. It accounts for vacancies. It accounts
for the fact that Unit 3B was empty for a month
between tenants. It accounts for bad debt, the
guy in 2A who just stopped paying his rent three
months ago. So let's play this out. I'm a seller.
I want my property's GRM to look as low as possible
because we said low is good for a buyer. Which
rent number am I going to use in my calculation?
You are going to use the potential rent. Every
single time. Because it's a bigger number. Right.
A bigger denominator means a smaller result in
the final division. Exactly. Let's say the price
is $1 million. The actual effective rent collected
was $100 ,000. The real GRM is 10. Okay. A GRM
of 10. That's pretty decent. But the seller on
their marketing flyer says, oh, but if you fixed
up the basement and rented it out and you raised
rents on everyone else to the absolute maximum,
the... Potential rent is $200 ,000. So they take
the $1 million price and divide it by their fantasy
$200 ,000 rent. which gives a GRM of five. And
suddenly the deal looks absolutely amazing. A
GRM of five. I have to buy this. But I'm buying
a fantasy. You are paying real money today for
imaginary rent that might never materialize.
Mixing these two up leads to catastrophic valuations.
The source is very clear. You must observe multiples
at comparable properties that have actually sold
to get a baseline. And you have to know, did
that building sell based on what it was making
or what the buyer hoped it could make? So the
rule is never. The rule is audited financials
only. A T12, a trailing 12 -month profit and
loss statement. Don't tell me what it could make.
Show me the bank deposits. Use the effective
income for your GRM, not the potential. Unless.
Unless. Well, unless you're a professional developer
and your entire business model is buying broken
buildings and creating that potential. But that's
a different game. For the average investor, stick
to reality. Stick to reality. I like that. Which
leads us to our final and maybe most sobering
reality check, Section 7, the shortcut critique
and the DCF model. We've spent a good chunk of
time talking about how useful GRM can be as a
quick filter, but our source material takes a
pretty sharp turn towards the end. It does. It
basically stops being polite and starts being
very academic. It calls procedures like GRM and
cap rate shortcut procedures. That phrase alone
feels a bit derogatory. It's meant to be. And
then it drops the hammer. And I'm quoting directly
here. As causal models of asset value, they are
at best simplistic and at worst incomplete and
sometimes misleading. At worst misleading. That
is the academic way of saying this tool is dangerous
and can make you lose your shirt. So if GRM is
the dangerous misleading shortcut, what is the
correct way? What is the model that the pros
use that isn't misleading? The source points
to what's called the multi -period discounted
cash flow procedure, or DCF. Multi -period discounted
cash flow. Okay, that sounds like something you
need a PhD in finance to calculate. Or at least
a very, very good Excel spreadsheet with a lot
of tabs. How is it different from GRM? Can you
use an analogy for me? Sure. GRM is a Polaroid
snapshot. It's instant. You press the button
and you get one picture of one moment. In time,
today's price, today's rent. It's completely
static. Okay, a snapshot. I get that. DCF is
a full -length documentary film. The source says
it looks at the more complete multi -period total
return perspective. It forces you to project
the entire movie of this building's financial
life for the next 5, 10, or even 20 years. So
it's not just asking, what's the rent today?
It's asking questions like, what will the rent
be in year three? What happens when the roof
inevitably fails in year five? What happens when
the special property tax abatement expires in
year eight and taxes double? Exactly. It projects
all of those future cash flows, both positive
and negative, and then it discounts them back
to what that future money is worth in today's
dollars. Because a dollar in 10 years is worth
less than a dollar today. That sounds incredibly
complex. It is, but it's how true fundamental
value is determined. The source gives a very
specific high value example. a property valued
at $18 ,325 ,000. That's a very, very specific
number. Not $18 million, but $18 ,325 ,000. Now,
a broker, a salesperson, might look at that deal
after it closes and say, oh, that property traded
at a 5 .46 % cap rate, or it traded at a GRM
of X. And we, the observers on the outside, think,
okay, so the market value was determined by that
cap rate. People wanted a 5 .46 % return, so
they paid that price. But the source says that
is a fundamental causal. misunderstanding causal
as in cause and effect right the building isn't
worth 18 million dollars because the cap rate
is 5 .46 that's getting the cause and effect
completely backward so explain the true causality
what actually happened the investors who bought
it they did the dcf They built the movie. They
looked at the 10 year cash flow projections.
They argued about inflation assumptions and future
tax rates. They calculated the risk of the neighborhood.
And that complex, forward looking model spit
out a number. Based on our projections, this
building is worth $18 ,325 ,000 to us. So the
DCF calculation caused the price. Yes. The longer
term total return perspective, the DCF, caused
the value. The cap rate and the GRM are just,
and this is a quote, a reflective representation
of all that deep underlying work. A reflective
representation. That is deep. That's a great
phrase. Think of it like a shadow on a wall.
The DCF is the object itself, the complex three
-dimensional reality of the investment with all
its textures and flaws. The GRM is just the simple
two -dimensional shadow that object casts on
the wall. And if I only look at the shadow. You
might get the general shape. Oh, it's big. Oh,
it looks tall. But you can't see the texture.
You can't see the color. And, you know, depending
on where the light is, a shadow can be very distorted.
So the GRM is the shadow on the napkin. It's
useful because I can see it from across the room
at the diner. But I shouldn't ever buy the building
based on the shadow alone. Exactly. You use the
shadow to decide if it's worth walking over to
the wall to actually look at the object up close.
I love that. It puts the tool in its proper place.
It's not the Bible. It's the brochure. The brochure.
That's a good one. Okay, we have covered a massive
amount of ground today. From the back of the
napkin to the... The philosophical nature of
value shadows. Let's try to bring it all home
with a quick recap. Sure, let's do it. First,
gross rent multiplier. The formula is price divided
by gross annual rent. And remember, that's effective
gross income. Use the real rent you actually
collect, not the fantasy rent from the flyer.
Second, it's a measure of time. It's the years
to pay back. Lower is generally better, but too
low can be a sign of danger. Third. Watch out
for the monthly trap. If you see a number like
100, just divide by 12 to get the real annual
multiplier. Fourth, it only works because of
uniformity. It's fantastic for comparing apples
to apples, but it fails completely when you're
comparing brand new apples to old rotten apples.
And finally, the big one. It is a shortcut. It's
a reflective representation. It gives you a hint,
but it does not replace the hard, forward -looking
work of a discounted cash flow analysis for determining
true value. So here's my final thought for you,
the listener. The next time you walk past a for
-sale sign on an apartment building, or maybe
the next time you're in an argument with a friend
about whether real estate in your city is a bubble,
I want you to do the napkin math. Do the simple
division in your head. Take the price. Make a
rough estimate of the annual rent. And get that
number. Is it a 15? Is it a 40? And if it's a
40, you have to ask yourself, why is someone
willing to wait 40 years just to get their initial
money back before any expenses? What are they
seeing that I'm not? And if it's a 5, ask yourself
the opposite question. What is so wrong with
this building that they are desperate to get
out so fast? The number isn't the answer. The
number is the question. That is the perfect place
to leave it. The GRM isn't the answer key. It's
the question you ask to start the real conversation.
thanks for joining us on this deep dive go find
some shadows and see what's casting them happy
investing