A property has a gross monthly rent of $3,600 and sold for $432,000. The gross rent multiplier (GRM) is:
Correct Answer
B) 120
GRM = Sale Price ÷ Gross Monthly Rent. Calculation: $432,000 ÷ $3,600 = 120. This multiplier can be used to estimate value of similar properties by multiplying their gross monthly rent by the GRM.
Why This Is the Correct Answer
Option B (120) is correct because the GRM formula is Sale Price ÷ Gross Monthly Rent. Substituting the given values: $432,000 ÷ $3,600 = 120. This means the property sold for 120 times its monthly gross rent. The calculation is straightforward division with no additional conversions needed. This GRM of 120 indicates that it would take 120 months (10 years) of gross rental income to equal the sale price.
Why the Other Options Are Wrong
Option A: 10.0
Option A (10.0) represents the result if someone incorrectly divided the monthly rent by the annual rent equivalent, or confused GRM with Gross Rent Yield percentage calculation.
Option C: 12.0
Option C (12.0) would be the result if someone incorrectly used annual rent instead of monthly rent in the denominator ($432,000 ÷ $43,200 annual rent = 10, but this still doesn't equal 12.0).
Option D: 144
Option D (144) would result from an error in calculation, possibly multiplying instead of dividing, or using incorrect figures in the computation.
GRM = Sale Price Goes Monthly
Remember 'Sale Price Goes Monthly' - Sale price is the big number on top, Monthly rent goes on the bottom. Think of it as 'How many Monthly payments would it take to buy this property?'
How to use: When you see a GRM question, immediately identify the sale price (larger number) and monthly rent (smaller number), then divide big by small to get your multiplier.
Exam Tip
Always double-check that you're using monthly rent, not annual rent, in GRM calculations - this is the most common error on exam questions.
Common Mistakes to Avoid
- -Using annual rent instead of monthly rent in the calculation
- -Confusing GRM with capitalization rate or other income ratios
- -Reversing the formula by dividing rent by sale price instead of sale price by rent
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a fundamental valuation tool in real estate that establishes a relationship between a property's sale price and its gross monthly rental income. It serves as a quick comparative analysis method to estimate property values in the income approach to appraisal. The GRM is calculated by dividing the sale price by the gross monthly rent, resulting in a multiplier that indicates how many months of gross rent equal the property's value. This metric is particularly useful for comparing similar rental properties and making rapid value estimates, though it doesn't account for operating expenses, vacancy rates, or other factors that affect net income.
Background Knowledge
The Gross Rent Multiplier is one of three main approaches to property valuation, falling under the income approach alongside the sales comparison and cost approaches. GRM differs from other income ratios like capitalization rates because it uses gross income rather than net operating income, making it simpler but less precise for investment analysis.
Real-World Application
Appraisers use GRM to quickly screen potential comparable sales and estimate values for rental properties. For example, if similar properties in an area have GRMs around 120, an appraiser can multiply a subject property's monthly rent by 120 to get a rough value estimate before conducting more detailed analysis.
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