A property sold for $400,000 with annual gross rent of $40,000. What is the gross rent multiplier?
Correct Answer
A) 10.0
GRM is calculated by dividing sale price by annual gross rent. $400,000 ÷ $40,000 = 10.0.
Why This Is the Correct Answer
Option A (10.0) is correct because GRM is calculated by dividing the sale price by the annual gross rent. Using the formula: GRM = Sale Price ÷ Annual Gross Rent, we get $400,000 ÷ $40,000 = 10.0. This means it would take 10 years of gross rental income to equal the purchase price. The GRM is always expressed as a simple number without units, representing the multiple of annual rent that equals the sale price.
Why the Other Options Are Wrong
Option B: 0.10
Option B (0.10) is incorrect because this represents the reciprocal of the GRM calculation. This would be the result if you incorrectly divided annual gross rent by sale price ($40,000 ÷ $400,000 = 0.10). This figure represents the gross rent yield or capitalization rate concept, not the gross rent multiplier.
Option C: 100
Option C (100) is incorrect and represents a calculation error, possibly from confusing monthly rent with annual rent or making an arithmetic mistake. If someone mistakenly used monthly rent of $40,000 instead of annual rent, they might arrive at this inflated number, but the problem clearly states annual gross rent.
Option D: 40
Option D (40) is incorrect and appears to be simply stating the annual gross rent amount rather than performing any calculation. This shows a fundamental misunderstanding of what GRM represents - it's not the rent amount itself, but the relationship between price and rent expressed as a multiplier.
Price Over Rent = POR
Remember 'POR' - Price Over Rent. Think of it as 'pouring' the sale price over the annual rent to get your multiplier. The bigger number (price) always goes on top, the smaller number (rent) goes on bottom.
How to use: When you see a GRM question, immediately think 'POR' and set up the division with Price on top, Rent on bottom. This prevents the common error of putting rent over price.
Exam Tip
Always double-check that you're using annual rent, not monthly rent. If given monthly rent, multiply by 12 first. The GRM should typically fall between 4-15 for most residential properties, so if your answer seems way off, recheck your calculation.
Common Mistakes to Avoid
- -Dividing rent by price instead of price by rent
- -Using monthly rent instead of annual rent
- -Confusing GRM with capitalization rate or other ratios
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a fundamental real estate investment metric that measures the relationship between a property's purchase price and its gross rental income. It provides a quick way to compare investment properties and assess their relative value in the market. The GRM indicates how many years of gross rent it would take to equal the purchase price, making it a useful screening tool for investors. Understanding GRM calculation is essential for appraisers as it's commonly used in the income approach to valuation, particularly for smaller residential income properties.
Background Knowledge
The Gross Rent Multiplier is one of three main approaches used in real estate appraisal, specifically within the income approach. It's particularly useful for quick comparisons of similar rental properties and is most commonly applied to residential income properties like duplexes, small apartment buildings, and single-family rental homes.
Real-World Application
Appraisers use GRM to quickly screen comparable sales and assess whether a property's asking price is reasonable compared to its rental income potential. Real estate investors use it to compare multiple properties and identify potentially undervalued or overvalued rental properties in their market analysis.
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