A property generates $8,500 in monthly gross rent. If the GRM for the area is 11.2, what is the estimated value?
Correct Answer
B) $1,142,400
First convert monthly rent to annual: $8,500 × 12 = $102,000. Then multiply by GRM: $102,000 × 11.2 = $1,142,400.
Why This Is the Correct Answer
Option B is correct because it follows the proper two-step GRM calculation process. First, the monthly gross rent of $8,500 is converted to annual gross rent by multiplying by 12 months, yielding $102,000. Then, this annual gross rent is multiplied by the area's GRM of 11.2 to arrive at the estimated property value of $1,142,400. This demonstrates the fundamental GRM formula: Property Value = Annual Gross Rent × GRM.
Why the Other Options Are Wrong
Option A: $95,200
Option A ($95,200) appears to be the result of multiplying the monthly rent ($8,500) by the GRM (11.2) without first converting to annual rent, yielding $95,200. This is incorrect because it mixes time periods - applying an annual multiplier to monthly income.
Option C: $759
Option C ($759) is far too low to represent a property value and appears to be a calculation error, possibly dividing instead of multiplying, or using incorrect figures entirely. This amount would not make sense as a property valuation.
Option D: $102,000
Option D ($102,000) represents only the annual gross rent calculation ($8,500 × 12) but fails to complete the second step of multiplying by the GRM. This is the intermediate step, not the final estimated property value.
GRM Two-Step Dance
Remember 'MAG' - Monthly to Annual, then Get value with GRM. Step 1: Convert Monthly rent to Annual (×12). Step 2: Apply GRM (Annual rent × GRM = value).
How to use: When you see a GRM problem, immediately think 'MAG' and perform the two-step dance: first convert monthly to annual if needed, then multiply by the GRM to get the estimated value.
Exam Tip
Always check whether the given rent is monthly or annual, and ensure your GRM calculation uses annual figures. Circle or highlight the time period in the question to avoid mixing monthly and annual amounts.
Common Mistakes to Avoid
- -Applying GRM to monthly rent instead of converting to annual rent first
- -Stopping at the annual rent calculation without applying the GRM
- -Confusing GRM with other multipliers or capitalization rates
Concept Deep Dive
Analysis
This question tests the application of the Gross Rent Multiplier (GRM) method, which is a quick valuation technique used in real estate appraisal. The GRM is calculated by dividing the sale price of comparable properties by their annual gross rental income, creating a multiplier that can be applied to estimate the value of similar properties. This method assumes that properties with similar rental income characteristics should have proportional market values. The key to solving GRM problems is ensuring that the time periods for rent and the multiplier are consistent - if the GRM is annual, monthly rent must be converted to annual rent before applying the multiplier.
Background Knowledge
The Gross Rent Multiplier (GRM) is derived from market data of comparable property sales and their corresponding rental incomes, typically expressed as an annual multiplier. GRM is most commonly used for income-producing residential properties and provides a quick estimate of value, though it's less precise than detailed income capitalization methods since it doesn't account for expenses, vacancy rates, or other operational factors.
Real-World Application
Appraisers use GRM for quick property valuations, especially for rental properties like duplexes or small apartment buildings. For example, if analyzing a rental property in a neighborhood where similar properties sell for 11.2 times their annual rent, this multiplier helps estimate market value based on the subject property's rental income potential.
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