A comparable property sold for $350,000 and has a monthly rent of $2,800. What is the gross rent multiplier (GRM)?
Correct Answer
A) 125
GRM = Sale Price ÷ Monthly Rent. $350,000 ÷ $2,800 = 125. This multiplier can be applied to similar properties to estimate value.
Why This Is the Correct Answer
Option A (125) is correct because it follows the standard GRM formula: Sale Price ÷ Monthly Rent = GRM. When we divide $350,000 by $2,800, we get exactly 125. This means the property sold for 125 times its monthly rental income, which is a reasonable GRM for many residential investment properties. The calculation is straightforward: $350,000 ÷ $2,800 = 125, making this the only mathematically correct answer.
Why the Other Options Are Wrong
Option B: 10.4
Option B (10.4) represents an incorrect calculation that appears to divide monthly rent by a portion of the sale price, possibly $2,800 ÷ $269 or similar error. This low number would be unrealistic for a GRM, as it would suggest the property could be purchased for only about 10 months of rental income, which is extremely unlikely in real estate markets.
Option C: 33.6
Option C (33.6) seems to result from dividing the monthly rent by some incorrect denominator, possibly attempting to calculate an annual figure incorrectly. This could occur if someone mistakenly divided $2,800 by approximately $83, but this doesn't follow any standard real estate calculation formula and produces an unrealistically low GRM.
Option D: 104
Option D (104) appears to be close to the correct answer but represents a calculation error, possibly from rounding mistakes or using slightly incorrect figures in the division. While 104 might seem reasonable as a GRM, it doesn't result from the correct mathematical operation of $350,000 ÷ $2,800, which clearly equals 125.
GRM = Great Real Math
Remember 'GRM = Great Real Math: Sale price Goes Right over Monthly rent' - visualize the division symbol with sale price on top and monthly rent on bottom. Think 'How many Monthly payments equal the Sale price?'
How to use: When you see a GRM question, immediately identify the sale price (bigger number) and monthly rent (smaller number), then visualize the division with sale price ÷ monthly rent, asking yourself 'how many months of rent equals the purchase price?'
Exam Tip
Always double-check your division by multiplying your GRM answer by the monthly rent - it should equal the sale price. If 125 × $2,800 = $350,000, you know you're correct.
Common Mistakes to Avoid
- -Dividing monthly rent by sale price instead of sale price by monthly rent
- -Using annual rent instead of monthly rent in the calculation
- -Confusing GRM with capitalization rate or other income ratios
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a fundamental real estate valuation tool that measures the relationship between a property's sale price and its gross monthly rental income. It provides a quick method for comparing investment properties and estimating market value based on rental income. The GRM is calculated by dividing the sale price by the monthly gross rent, resulting in a multiplier that indicates how many months of rent equal the property's purchase price. This metric is particularly useful in the income approach to valuation and helps appraisers and investors quickly assess whether a property is reasonably priced relative to its income-generating potential.
Background Knowledge
The Gross Rent Multiplier is one of three primary approaches to real estate valuation, alongside the sales comparison approach and cost approach. GRM is particularly useful for income-producing properties and provides a quick screening tool for investors to compare similar properties in the same market area.
Real-World Application
Appraisers use GRM to quickly evaluate rental properties by comparing the subject property's potential GRM to recently sold comparable properties, helping determine if a property is overpriced or underpriced relative to its income potential in the current market.
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