Payback Period

The payback period is the time it takes for an investment's cash inflows to repay its initial cost. A gross rent multiplier on annual rent reads like a payback period on gross rent: a GRM of 10.4 means about 10.4 years of rent to equal the price, before any expense is paid.

That reading is a useful intuition and a poor measure. Real payback uses cash flow after expenses and debt, which on most rentals takes far longer than the GRM suggests. With expenses at a third or more of rent, the NOI payback on the $500,000 example is about 17 years, and financing changes it again.

Payback also shares GRM's blind spots. It ignores the time value of money, anything after the payback date, and the sale price. It works as a rough filter. For a real decision, use cash on cash return for the first year and internal rate of return for the whole hold.

Further reading: Payback Period on Wikipedia.