A building's gross rent multiplier (GRM) is 120. If the monthly rent is $2,500, what is the indicated value?
Correct Answer
C) $300,000
Why this is correct: The Gross Rent Multiplier (GRM) is a valuation concept where Value = Monthly Rent * GRM. Applying the given facts: 2,500 dollars * 120 = 300,000 dollars. This matches the correct choice. Why the other choices are wrong: "$20,833" results from dividing the rent by the GRM, which is the inverse of the correct formula. "$3,600,000" incorrectly uses annual rent (2,500 dollars * 12 months = 30,000 dollars) and then multiplies by 120. "$250,000" is simply 2,500 dollars * 100, using an incorrect multiplier. Exam tip: For GRM problems, confirm whether the rent given is monthly or annual to match the multiplier's basis. The formula is always Value = Rent * Multiplier.
Why This Is the Correct Answer
Option A is correct because the GRM formula is straightforward: Property Value = Monthly Rent × GRM. Substituting the given values: $2,500 × 120 = $300,000. This calculation directly applies the fundamental GRM relationship where the multiplier (120) represents how many times the monthly rent equals the property's estimated value. The GRM of 120 means the property is worth 120 times its monthly rental income.
Why the Other Options Are Wrong
GRM = Gross Rent MULTIPLY
Remember 'GRM = Gross Rent MULTIPLY' - the word 'Multiplier' tells you to MULTIPLY the monthly rent BY the GRM number. Think 'Monthly Money × Magic Number = Market Value'
How to use: When you see a GRM problem, immediately identify the monthly rent and GRM number, then remember 'MULTIPLY not divide' - the GRM multiplies the rent to get value, never divides it.
Exam Tip
Always double-check that you're multiplying (not dividing) and using monthly rent (not annual) - these are the two most common errors on GRM questions.
Common Mistakes to Avoid
- -Dividing monthly rent by GRM instead of multiplying
- -Using annual rent instead of monthly rent in the calculation
- -Confusing GRM with cap rate formulas and using net income instead of gross rent
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation tool used in real estate appraisal to estimate property value based on rental income. It represents the relationship between a property's market value and its gross monthly rental income. The GRM is calculated by dividing the sale price of comparable properties by their monthly rent, creating a market-derived multiplier. This method provides a rapid estimation technique but should be used alongside other valuation approaches for comprehensive analysis. The GRM assumes that properties with similar rent-to-value ratios will have comparable market values.
Background Knowledge
The GRM is derived from market data by analyzing recent sales of comparable rental properties and calculating the ratio of sale price to monthly rent. Unlike capitalization rates which use net operating income, GRM uses gross rental income and doesn't account for expenses, making it a simpler but less precise valuation method.
Real-World Application
Appraisers use GRM for quick property valuations, especially for small residential rental properties and preliminary assessments. Investors use it to rapidly compare rental property deals, though it should be supplemented with cap rate analysis and detailed income/expense review for final decisions.
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