Zoning

Zoning is the local rule set that controls how land may be used and how densely it may be built: single-family, multifamily, commercial or mixed. It sets the ceiling on a property's rent. A gross rent multiplier reflects the current use, while zoning decides what uses are possible.

A lot that allows an extra unit, such as an accessory dwelling unit, can hold more rent than it earns today. If an owner adds a unit renting for $1,500 a month at a total cost of $60,000, the property's GRM falls from 10.4 to about 8.5 on the higher combined price and rent. Whether that works depends on local rules and building costs.

Zoning also explains some high GRMs. Properties on land zoned for much more density often sell above what their current rent supports, because buyers are pricing a redevelopment. In those cases the GRM describes the land, not the rental.

Further reading: Zoning on Wikipedia.