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
B) 10.4
Why this is correct: The Gross Rent Multiplier (GRM) is calculated as Sale Price divided by Gross Rental Income. The question provides monthly rent. The annual GRM is Sale Price divided by Annual Gross Rent: $350,000 / ($2,800 x 12) = $350,000 / $33,600 = 10.4167, or 10.4. The answer 10.4 represents the annual GRM. Why the other choices are wrong: '125' is the monthly GRM ($350,000 / $2,800), but the question's correct answer is 10.4, indicating the annual multiplier is sought. '104' is incorrect, being ten times the correct answer. '12.5' is close but not the precise result of the calculation. Exam tip: GRM can be monthly or annual. When given monthly rent, ensure you use the correct time period as implied by the answer choices. Here, 10.4 is the annual GRM.
Why This Is the Correct Answer
Why this is correct: The Gross Rent Multiplier (GRM) is calculated as Sale Price divided by Gross Rental Income. The question provides monthly rent. The annual GRM is Sale Price divided by Annual Gross Rent: $350,000 / ($2,800 x 12) = $350,000 / $33,600 = 10.4167, or 10.4. The answer 10.4 represents the annual GRM. Why the other choices are wrong: '125' is the monthly GRM ($350,000 / $2,800), but the question's correct answer is 10.4, indicating the annual multiplier is sought. '104' is incorrect, being ten times the correct answer. '12.5' is close but not the precise result of the calculation. Exam tip: GRM can be monthly or annual. When given monthly rent, ensure you use the correct time period as implied by the answer choices. Here, 10.4 is the annual GRM.
Why the Other Options Are Wrong
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.
More Valuation Principles Questions
An appraiser is valuing a property that generates $8,000 per month in gross rent. Recent sales of similar properties show gross rent multipliers ranging from 110 to 130. What is the indicated value range using GRM analysis?
A property generates $85,000 in Net Operating Income and sells for $1,062,500. What is the overall capitalization rate?
In determining highest and best use, which criterion must be met first?
Which of the following is NOT typically included in operating expenses for income capitalization?
A comparable sale occurred 8 months ago for $425,000. Market conditions indicate property values have increased 0.5% per month since that time. What is the adjusted sale price?
A property generates $150,000 in potential gross income. Market data indicates a 7% vacancy rate and operating expenses of 35% of effective gross income. If the cap rate is 9.5%, what is the indicated value?
A property sold for $320,000 one year ago. If market conditions have improved by 6% since that sale, what is the time-adjusted sale price for comparison purposes?
An appraiser is valuing a 2,000 sq ft home and finds a comparable sale of a 2,200 sq ft home that sold for $440,000. If the adjustment for square footage is $75 per sq ft, what is the adjusted sale price of the comparable?
A commercial building cost $2,500,000 to construct. The land value is $600,000. If the building has suffered 15% physical deterioration and 8% functional obsolescence, what is the depreciated cost of the improvements?
A property is financed with 70% debt at 6% interest and 30% equity requiring a 12% return. What is the overall capitalization rate using the band of investment technique?
People Also Study
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Report Writing & Compliance
10% of exam