What term is used to describe the ratio of the price of investment property to its annual rental income?

The term that describes the ratio of the price of investment property to its annual rental income is known as the Gross Rent Multiplier (GRM). The GRM is a simple method used by real estate investors to evaluate rental properties by determining how much they are paying for the income generated from the property.

To calculate the GRM, you take the property’s purchase price and divide it by the annual rental income. A lower GRM suggests a more attractive investment, as it indicates a better return on investment in relation to the income produced. This metric helps investors make quick comparisons between potential investment properties to ascertain which might be more profitable.

In contrast, the other terms refer to different financial metrics, such as capitalization rate, which measures the rate of return based on net operating income rather than total income; net operating income, which represents the total revenue from a property minus operating expenses; and debt service coverage ratio, which assesses a property’s ability to cover debt obligations with its income. Understanding these distinctions is key for anyone involved in real estate investing.