If there had been a 5% increase in the rent then the price increase is even greater. That duplex would be at $546,000 ( a 51.6% price increase)
If 14 is the normal gross rent multiplier for an area. Then the "normal" price would be $280,000 at a the lower income level and climb to $294,000 after the rent increases.
I have never met an investor who wanted to pay "normal" They all want it cheaper.
Translation of 18 to 26 ? Easy - Seller is asking twice what it is worth as an income producing investment. Disclaimer - the "market value" could be the asking price based on other factors such as underlying land value, development potential, suitability for owner occupant use, OR as was the case from 2003 through 2005 - Speculation based on the Bigger Fool Theory.
I will give an example where the using a "historical" GRM to derive that number could be flawed, in this second example the property is correctly valued, But the GRM was poorly communicated.
Fourplex was in need of major renovations, Entire building was vacant for most of the year.
Gross rental income was only $10,000 that year. Lisitng agent enters GRM based on last years rent as 26 because the price for the now fully renovated and fully leased building is $260,000.
The "pro forma" (expected gross rental income next year) is $26,000.
If the listing agent had entered the projected GRM it would have been 10 which is within the range of feasibility that warrants further number crunching.
At first read, you might think the LA made a mistake. However, the LA may have declined to advertise the projected GRM out of fear of being accused of misrepresentation by a buyer who does not subsequently obtain projected market rents.
Occasionally it is the property that is represented by an agent who is not an investment expert that is the gem you want to pick up. Such properties justify a thourough reading of the MLS data, rather than reliance on a single number as indicator.
If you have hundreds of properties to sift through, the GRM is an effective filter, with a few exceptions such as my second example.
In the example that Graham gave, I will expand the scenarion and presume that last year the duplex in question generated $20,000 in rental income per year and the price was $360,000.
Today, with no increase in annual income the seller is now asking $520,000.
Clearly, one need not waste another second analysing such a property for an investor seeking income.
The price may be justifiable for some other reason, such as it comes with a large amount of developable land or the duplex is on Rich Guy Lane, and it is suitable for owner occupancy, because it is so nice.