Rack-Rent

Rack-rent is the full market rent a property can command. A property is rack-rented when the rent the tenant currently pays, the passing rent, equals its market rental value. The distinction decides which rent a gross rent multiplier is built on, and whether the multiplier describes the property as it is or as it could be.

A GRM on passing rent describes the income you will actually collect until the lease resets. A GRM on market rent describes the property's potential. On a $300,000 property leased at $2,200 in a $2,500 market, the two multipliers are 11.4 and 10. Buyers pay somewhere between, depending on when the reset comes.

Sellers quote the market figure; buyers should underwrite the passing figure and treat the gap as upside that arrives later. When the lease is above market, the reverse applies and the passing-rent GRM flatters the property until it resets. Either way, ask which rent a multiplier was built on before comparing it to anything.

Further reading: Rack-Rent on Wikipedia.