A property sold for $350,000 and generates $2,800 per month in gross rental income. What is the Gross Rent Multiplier (GRM)?
Correct Answer
A) 10.4
GRM = Sale Price ÷ Monthly Gross Rent = $350,000 ÷ $2,800 = 125. However, this appears to be asking for the monthly GRM: $350,000 ÷ ($2,800 × 12) = 10.4.
Why This Is the Correct Answer
GRM = Sale Price ÷ Monthly Gross Rent = $350,000 ÷ $2,800 = 125. However, this appears to be asking for the monthly GRM: $350,000 ÷ ($2,800 × 12) = 10.4.
Why the Other Options Are Wrong
Option B: 104
This answer (104) would result from an incorrect calculation or misunderstanding of the formula. It doesn't match either the monthly GRM calculation ($350,000 ÷ $2,800 = 125) or the annual GRM calculation ($350,000 ÷ $33,600 = 10.4).
Option C: 125
This answer (125) represents the monthly GRM calculation: $350,000 ÷ $2,800 = 125. However, the correct answer is 10.4, suggesting the question is asking for annual GRM, which requires converting monthly rent to annual rent first.
Option D: 12.5
This answer (12.5) appears to be a calculation error, possibly from dividing the monthly rent by some other figure or misapplying the GRM formula. It doesn't correspond to either the correct monthly or annual GRM calculations.
GRM Formula Memory Aid
Remember 'SPGR' - Sale Price over Gross Rent. For monthly GRM: 'Monthly Money Matters' (use monthly rent). For annual GRM: 'Annual Analysis Applies' (multiply monthly by 12 first).
How to use: When you see a GRM question, immediately identify SPGR (Sale Price ÷ Gross Rent), then determine if the answer choices suggest monthly (typically 100-300) or annual GRM (typically 8-15 for residential properties).
Exam Tip
Always check if the rental income given is monthly or annual, and look at the answer choices to determine which type of GRM is expected - monthly GRMs are typically much higher numbers than annual GRMs.
Common Mistakes to Avoid
- -Confusing monthly vs. annual GRM calculations
- -Forgetting to multiply monthly rent by 12 for annual GRM
- -Using net income instead of gross rental income
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation tool used to estimate property value based on gross rental income. There are two types: monthly GRM (sale price ÷ monthly rent) and annual GRM (sale price ÷ annual rent). The monthly GRM is more commonly used in residential appraisal practice. This question tests understanding of which calculation method to use and proper formula application. The confusion in the provided explanation highlights the importance of clearly identifying whether monthly or annual GRM is being requested.
Background Knowledge
GRM is calculated as Sale Price ÷ Gross Rental Income, where the time period (monthly vs. annual) must be consistent. Monthly GRM uses monthly rent, while annual GRM uses annual rent (monthly rent × 12). Lower GRM values generally indicate better investment potential, as the property generates more income relative to its price.
Real-World Application
Appraisers use GRM for quick property comparisons and to check if income approach values are reasonable. Investors use it to rapidly screen potential rental properties, with lower GRMs generally indicating better cash flow potential relative to purchase price.
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