Operating Expense

Operating expenses are the repeating bills a rental generates, such as taxes, insurance, repairs, management fees, utilities the owner covers and association dues. A gross rent multiplier leaves every one of them out. That is the whole shortcut, and also its main weakness.

GRM works as a screen when the properties being compared have similar expenses as a share of rent. This site's calculator assumes 5% vacancy and expenses at 36% of collected rent, which turns $48,000 of gross rent into about $29,200 of net operating income on the $500,000 example.

When expenses differ, so does the value, even at the same rent. A condo with $400 a month in dues has about $4,800 a year less net income than an otherwise identical house, which is roughly a full point of cap rate at $500,000. The GRMs are identical. The cap rates are not.

Further reading: Operating Expense on Wikipedia.