A property sold for $350,000 and generates $42,000 in annual gross rent. What is the Gross Rent Multiplier (GRM)?
Correct Answer
A) 8.33
GRM is calculated by dividing the sale price by the annual gross rent. $350,000 ÷ $42,000 = 8.33.
Why This Is the Correct Answer
Option A (8.33) is correct because it properly applies the GRM formula: Sale Price ÷ Annual Gross Rent. Using the given values: $350,000 ÷ $42,000 = 8.33. This means it would take approximately 8.33 years of gross rental income to equal the purchase price. The calculation is straightforward division with no additional adjustments needed.
Why the Other Options Are Wrong
Option B: 12.0
Option B (12.0) is incorrect because it appears to be the result of dividing the annual rent by monthly rent ($42,000 ÷ $3,500 = 12), which is not the GRM calculation. This represents the number of months in a year, not the relationship between sale price and annual rent.
Option C: 0.12
Option C (0.12) is incorrect because it represents the reciprocal calculation (Annual Gross Rent ÷ Sale Price = $42,000 ÷ $350,000 = 0.12). This would be the gross rent yield or cap rate approximation, not the Gross Rent Multiplier.
Option D: 83.3
Option D (83.3) is incorrect because it appears to be a calculation error, possibly multiplying instead of dividing, or using an incorrect formula. This number is far too high for a realistic GRM and doesn't follow the proper mathematical relationship.
SPAG - Sale Price Above Gross
Remember SPAG: Sale Price Above Gross rent. Visualize the sale price sitting 'above' the gross rent in a fraction, with sale price on top (numerator) and gross rent on bottom (denominator). Think 'How many years of GROSS rent to pay for the SALE?'
How to use: When you see a GRM question, immediately think SPAG and set up the fraction: Sale Price (top) ÷ Annual Gross Rent (bottom). The answer will typically be between 4-15 for most residential properties, helping you verify your calculation makes sense.
Exam Tip
Always double-check that you're using annual gross rent, not monthly rent, in your calculation. If given monthly rent, multiply by 12 first, then divide the sale price by that annual figure.
Common Mistakes to Avoid
- -Using monthly rent instead of annual rent in the calculation
- -Inverting the formula (dividing rent by sale price)
- -Confusing GRM with cap rate or other income ratios
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a fundamental real estate investment metric used to quickly evaluate and compare income-producing properties. It represents how many years it would take for the gross rental income to equal the purchase price of the property. GRM is calculated by dividing the property's sale price by its annual gross rental income, providing a simple ratio for investment analysis. This metric is particularly useful for initial property screening and market comparisons, though it doesn't account for expenses, vacancy rates, or other operational factors.
Background Knowledge
GRM is one of three primary income approach methods used in real estate appraisal, alongside capitalization rates and discounted cash flow analysis. Understanding GRM is essential for comparing similar income properties and making quick investment decisions, though it should be used in conjunction with other financial metrics for comprehensive analysis.
Real-World Application
Appraisers use GRM to quickly screen comparable sales and establish value ranges for income properties. For example, if similar properties in an area have GRMs between 8-10, a property with a GRM of 15 might be overpriced, while one with a GRM of 6 might represent a good investment opportunity.
More Math & Stats Questions
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