A property sold for $450,000 and generated monthly rent of $3,200. What is the gross rent multiplier (GRM)?
Correct Answer
D) 140.6
Why this is correct: The Gross Rent Multiplier (GRM) is a ratio of sale price to gross monthly rent. The calculation is: Sale Price ÷ Monthly Rent. Step: $450,000 ÷ $3,200 = 140.625, which rounds to 140.6. Why the other choices are wrong: "11.7" results from using annual rent ($38,400) instead of monthly. "117.2" is off by a factor of 10. "14.1" might come from a misapplied cap rate calculation. Exam tip: GRM uses monthly rent; Gross Income Multiplier (GIM) uses annual income. Double-check which period the rent is given in.
Why This Is the Correct Answer
Option A (140.6) is correct because it follows the proper GRM formula: Sale Price ÷ Monthly Rent = $450,000 ÷ $3,200 = 140.625, which rounds to 140.6. This calculation tells us that it would take approximately 140.6 months of gross rental income to equal the purchase price. The formula is straightforward division with no additional conversions needed since we're using monthly rent (not annual) in the standard GRM calculation.
Why the Other Options Are Wrong
Option A: 11.7
Option A (11.7) appears to be the result of dividing monthly rent by a portion of the sale price, possibly $3,200 ÷ $273 or similar incorrect calculation. This reverses the proper GRM formula and would give a meaningless result that doesn't represent the relationship between price and rental income.
Option B: 117.2
Option B (117.2) might result from using annual rent instead of monthly rent in an incorrect calculation, such as ($3,200 × 12) ÷ $450,000, but this would actually give 0.085, so this appears to be from a different computational error entirely.
Option C: 14.1
Option C (14.1) could result from dividing the sale price by annual rent ($450,000 ÷ ($3,200 × 12) = $450,000 ÷ $38,400 = 11.7), but even that doesn't match, suggesting this is from an entirely different miscalculation or confusion with other real estate ratios.
GRM = Great Real Money
Remember 'GRM = Great Real Money' where Great (G) = Gross income, Real (R) = Rent, Money (M) = Monthly. The formula flows as 'Sale price divided by Monthly rent = Great way to compare Real estate Money makers.'
How to use: When you see a GRM question, think 'Great Real Money' and remember that the bigger number (sale price) goes on top, divided by the smaller monthly rent number. The result should be a number greater than 100 for most residential properties.
Exam Tip
Always double-check that you're using monthly rent, not annual rent, in GRM calculations. The answer should typically be between 100-200 for most residential properties - if your answer is much lower, you likely made a calculation error.
Common Mistakes to Avoid
- -Using annual rent instead of monthly rent in the calculation
- -Reversing the formula by 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 ratio used in real estate valuation that measures the relationship between a property's sale price and its gross monthly rental income. This metric serves as a quick screening tool for investors and appraisers to compare similar properties and assess relative value. The GRM indicates how many months of gross rent it would take to equal the purchase price of the property. Lower GRMs generally suggest better investment opportunities, while higher GRMs may indicate overpriced properties or markets with lower rental yields.
Background Knowledge
The Gross Rent Multiplier is one of three main approaches to real estate valuation (along with sales comparison and cost approaches) under the income approach. Unlike more complex income calculations like cap rates or net present value, GRM uses gross income without deducting expenses, making it a quick but somewhat crude comparison tool.
Real-World Application
Appraisers use GRM to quickly screen comparable sales and rental properties. For example, if similar properties in an area have GRMs around 120-150, a property with a GRM of 200 might be overpriced, while one with a GRM of 100 could represent a good investment opportunity or indicate the property needs significant repairs.
More Income Approach Questions
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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?
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