Rental Value

Rental value is the rent a property would command on the open market between a willing landlord and tenant, also called fair market rent or estimated rental value. It is the rent figure a gross rent multiplier should use. A GRM computed on a below-market lease understates the property; one computed on a seller's hopeful projection overstates it.

For a leased property, the passing rent and the rental value can differ. A lease at $3,500 on a unit worth $4,000 gives a GRM of 11.9 on passing rent and 10.4 on market rent at a $500,000 price. Buyers pay for the reversion when the lease resets, so the market-rent GRM is the better guide to value.

For a vacant property, rental value is the only rent there is, and it has to be supported by comparable listings, not the seller's number. Appraisers estimate it on a rent schedule from comparable rentals. Whichever figure you use, use the same basis for every property you compare, or the GRMs are not comparable.

Expected rental value is the rent a property should achieve once it is let at market rent, not the rent it collects today. It is the figure a grm should be built on, estimated from comparable rentals that have let recently rather than from a seller's projection.

Take three to five comparable rentals of similar size, condition and location, adjust for the differences, and use the middle figure. On a $500,000 property, an expected rental value of $4,000 a month is a grm of 10.4, while $3,500 a month is a grm of 11.9. Appraisers record the same estimate on a comparable rent schedule, which is the rent figure a lender underwrites to.