Let's take a look at the gross rent multiplier formula that shows you how to calculate the gross rent multiplier for a property:

Gross Rent Multiplier = Fair Market Value/Gross Rental Income
Example: $200,000 Fair Market Value / $24,000 Gross Rental Income = 8.3 GRM

The GRM formula compares a property's fair market value to its gross rental income. As you can see in the formula example, the payoff period occurs in just over 8 years. Other expenses, such as repairs to the unit, vacancies between renters, property taxes and insurance don't become a part of this calculation. However, it helps you make an accurate comparison between properties without taking these other things into consideration.

Capitalization rates, also known as cap rates, are measures used to estimate and compare the rates of return on multiple multi-family real estate properties. Cap rates are calculated by dividing the property’s net operating income (NOI) from its property asset value.

Cap rates can provide valuable insight into a property. But the cap rate is not the only metric used to determine an investment’s risk. With that, this should not be the only metric you consider when evaluating properties. Other factors, including the property’s individual characteristics and location, should also be taken into consideration.

The cap rate of a property is determined based on the potential revenue and the risk level as compared to other properties. Importantly, the cap rate will not provide a total return on investment. Instead, it will indicate an estimate of how long it will take to recover the initial investment in the property.

In order to effectively use this metric, you’ll need to learn how to calculate the cap rate. The formula you’ll need to calculate the cap rate is simply net operating income (NOI) divided by the property’s current market value.