A property sold for $240,000 and generates $2,000 in monthly rental income. What is the gross rent multiplier (GRM)?
Correct Answer
B) 10
GRM is calculated as Sale Price ÷ Monthly Rent: $240,000 ÷ $2,000 = 120. However, this represents months, so the GRM is 10 years.
Why This Is the Correct Answer
Option B (10) is correct because the GRM calculation requires annual rental income, not monthly. First, convert monthly rent to annual: $2,000 × 12 = $24,000 annual rental income. Then divide the sale price by annual rent: $240,000 ÷ $24,000 = 10. The explanation provided with the question contains an error - while $240,000 ÷ $2,000 does equal 120, this represents the number of months, which when converted to years (120 ÷ 12) gives us the correct GRM of 10.
Why the Other Options Are Wrong
Option A: 120
Option A (120) represents the number of months of rental income needed to equal the purchase price, not the GRM in years. This is the intermediate calculation step before converting to the annual GRM.
Option C: 20
Option C (20) would result from incorrectly using semi-annual rental income ($2,000 × 6 = $12,000) in the denominator, which is not a standard GRM calculation method.
Option D: 24
Option D (24) would result from incorrectly using only two years of monthly rental income ($2,000 × 24 = $48,000) as the denominator, which is not the proper GRM formula.
GRM Years Rule
Remember 'GRM = Get Rental Months, then Make it Years' - always convert monthly rent to annual (×12) before dividing into the sale price.
How to use: When you see a GRM question with monthly rent, immediately multiply the monthly amount by 12 to get annual rent, then divide the sale price by this annual figure.
Exam Tip
Always check if the rental income given is monthly or annual - if monthly, multiply by 12 first before calculating GRM, as the answer choices will reflect the annual calculation.
Common Mistakes to Avoid
- -Using monthly rent instead of annual rent in the calculation
- -Confusing GRM with other multipliers like price-to-rent ratios
- -Forgetting that GRM should be expressed in years, not months
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation tool used to compare investment properties by measuring the relationship between a property's sale price and its gross rental income. It represents how many years of gross rental income it would take to equal the purchase price of the property. The GRM is calculated by dividing the sale price by the annual gross rental income, providing a simple metric for investors to assess relative value. This ratio helps appraisers and investors quickly screen properties and make preliminary comparisons between similar investment opportunities.
Background Knowledge
GRM is always expressed as the number of years of gross rental income needed to equal the property's purchase price. The formula is: GRM = Sale Price ÷ Annual Gross Rental Income, where annual income must be calculated by multiplying monthly rent by 12.
Real-World Application
Appraisers use GRM to quickly compare similar rental properties in a market area, helping establish value ranges and identify properties that may be overpriced or underpriced relative to their income-generating potential.
More Math & Stats Questions
A rectangular lot measures 150 feet by 200 feet. What is the area of the lot in square feet?
A property has a potential gross income of $180,000, vacancy and collection loss of 7%, and operating expenses of $65,000. What is the NOI?
What is the mean of the following comparable sales prices: $285,000, $295,000, $305,000, $275,000, and $290,000?
A property generates $120,000 in net operating income and is valued at $1,500,000. What is the capitalization rate?
A building has potential gross income of $180,000, vacancy and collection loss of 8%, and operating expenses of $54,000. What is the net operating income?
A building cost $2,500,000 to construct 8 years ago. Using straight-line depreciation over a 40-year life, what is the current depreciated value?
A commercial property has a potential gross income of $180,000, vacancy and collection losses of $9,000, and operating expenses of $54,000. What is the net operating income (NOI)?
An office building has a gross rental income of $240,000, vacancy rate of 8%, and operating expenses of $75,000. What is the net operating income (NOI)?
A rectangular lot measures 150 feet by 200 feet. What is the area in square feet?
An irregular shaped lot has an area of 87,120 square feet. How many acres is this?
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
USPAP (Ethics & Standards)
15% of exam
Report Writing & Compliance
10% of exam