Terminal Value (Finance)

Terminal value is the value of an asset at the end of a forecast period, usually the sale price in a discounted cash flow analysis. Gross rent multiplier ignores it entirely. GRM prices a property on this year's rent alone and says nothing about what the property will be worth when you sell.

For most leveraged rentals the sale is the largest single cash flow in the investment, and appreciation between purchase and sale is often the largest source of total return. A DCF estimates terminal value by applying an exit cap rate or exit GRM to the final year's income, net of selling costs.

GRM's silence on terminal value is why a low multiplier in a declining market can be a worse investment than a high multiplier in a growing one. The low GRM buyer gets more rent per dollar today; the high GRM buyer is paying for a larger terminal value. Neither is visible in the multiplier. When the exit matters, and it usually does, GRM has done its job once the short list exists.

Further reading: Terminal Value (Finance) on Wikipedia.