Interest Rate

An interest rate is the cost of borrowing money, stated as a yearly percentage of the loan balance. It does not appear in a gross rent multiplier, yet it shapes the multiplier in two ways. It decides which GRMs cash flow for a financed buyer, and it pushes market GRMs up or down over time.

With 25% down, 5% vacancy and expenses at 36% of collected rent, a 30-year loan breaks even at a GRM near 10.7 at 6.5%, near 9.7 at 7.5% and near 8.8 at 8.5%. Each point of rate lowers the multiplier a financed buyer can pay by roughly one.

Market GRMs respond the same way, with a lag. When rates rise, fewer buyers can make the numbers work at existing multiples, and prices tend to adjust down against rent. When rates fall, multiples tend to expand. Comparable sales from a different rate environment need care for that reason.

Further reading: Interest Rate on Wikipedia.