Cash Flow

Cash flow on a rental is the money left each month or year after operating expenses and the mortgage payment. It is what the owner actually takes home. A gross rent multiplier cannot measure it, but it does predict it roughly: the lower the GRM, the more room there is for expenses and debt.

On the $500,000 example, net operating income is about $29,200 a year. Add a $375,000 loan at 7.5% for 30 years, about $31,500 a year in payments, and cash flow drops to roughly $2,300 below zero. The GRM of 10.4 is too high to cash flow with 25% down at that rate and typical expenses.

Under those same assumptions the break-even GRM is about 9.7 at 7.5%, about 10.7 at 6.5% and about 8.8 at 8.5%. That gives a rough sense of the multiplier a financed rental needs to pay for itself, as long as expenses and down payment are near the defaults.

Further reading: Cash Flow on Wikipedia.