Buy to Let

In the UK, buy to let names both the practice of purchasing homes to rent and the loans made for it. UK lenders and investors screen on rental yield, annual rent divided by price, which is the reciprocal of gross rent multiplier. A 10% gross yield is a GRM of 10; a 5% yield is a GRM of 20.

British lenders check these loans with an interest coverage ratio, where expected rent has to cover a stressed interest payment 1.25 to 1.45 times. Gross yield is the screen that comes before that test, the same role GRM plays in the US.

The reciprocal framing changes the intuition. In the US a lower GRM is better for a buyer; in the UK a higher yield is better, and the two statements are identical. Both markets have drifted the same way: yields of 8 to 10% (GRM 10 to 12.5) were common in cheap UK regions a decade ago and are now rare in the south, the way GRMs of 8 have become rare in large US metros.

UK buyers quote the same screen as gross rental yield, so the gross rent multiplier is 100 divided by the yield percentage. A 5% yield is a GRM of 20, an 8% yield is a GRM of 12.5, and a 10% yield is a GRM of 10.

A $500,000 property letting at $2,000 a month collects $24,000 a year, a 4.8% gross yield and a GRM of 20.8. The arithmetic is identical in pounds. UK lenders then stress the rent with an interest coverage ratio of 1.25 to 1.45 times, a test that neither gross yield nor GRM reflects.