Price-Earnings Ratio (P/E)

For a stock, the P/E ratio is share price over earnings per share. It tells an investor how many years of current earnings the price represents. A gross rent multiplier asks the same kind of question of a rental: how many years of gross rent the price represents.

The difference is what sits below the line. P/E uses earnings after expenses, interest and taxes. GRM uses rent before any of them. The closer real estate match to P/E is price divided by net operating income, which is the inverse of the cap rate. At $500,000 and $48,000 of rent, GRM is 10.4, while price over NOI is about 17.

Both ratios share the same weakness. A low multiple can mean a bargain or a problem the market has already priced in. A stock at 8 times earnings may have a shrinking business, and a rental at a GRM of 6 may sit in a declining area or need a new roof.

Further reading: Price-Earnings Ratio (P/E) on Wikipedia.