Cash-equivalent sale price is $450,000 and monthly gross rent is $3,200. What monthly price-to-rent multiplier results, rounded to one decimal?
Correct Answer
C) 140.6
450000÷3200 = 140.625. Common errors: annualizing the rent gives 11.7; misplacing the decimal in the rent gives 1406.3; reporting the annual gross yield percentage instead of the multiplier gives 8.5.
Why This Is the Correct Answer
Option C is correct because a monthly GRM is sale price divided by monthly rent: $450,000 ÷ $3,200 = 140.625, which rounds to 140.6. The sale price is already cash-equivalent, so no adjustment is needed.
Why the Other Options Are Wrong
Option A: 8.5
Option A, 8.5, is the annual gross yield expressed as a percentage, not a multiplier: $3,200 × 12 ÷ $450,000 × 100 = 8.5. The monthly GRM is $450,000 ÷ $3,200 = 140.6.
Option B: 11.7
Option B, 11.7, divides price by annual rent: $450,000 ÷ ($3,200 × 12) = 11.7, which is an annual multiplier. The question asks for the monthly multiplier, $450,000 ÷ $3,200 = 140.6.
Option D: 1406.3
Option D, 1406.3, misplaces the decimal in the rent: $450,000 ÷ $320 = 1406.3. Using the actual $3,200 monthly rent gives 140.6.
Price over rent
To build a multiplier, divide the price by the rent. To use it, multiply the rent by the multiplier.
How to use: Use this to decide whether to divide or multiply in GRM problems.
Exam Tip
Match the rent period to the multiplier asked for; monthly GRMs for houses are usually in the low hundreds.
Common Mistakes to Avoid
- -Dividing price by annual rent when a monthly GRM is asked
- -Computing a yield percentage instead of a multiplier
- -Using a sale price that has not been adjusted to cash equivalency
Concept Deep Dive
Analysis
This question tests deriving a monthly gross rent multiplier from a comparable sale. The GRM equals cash-equivalent sale price divided by monthly gross rent. The distractors annualize the rent, misplace the decimal or compute a yield instead of a multiplier.
Background Knowledge
A gross rent multiplier is derived by dividing a comparable's sale price by its gross rent. A monthly GRM uses monthly rent, and the same multiplier is later applied to the subject's monthly rent. Sale prices should be cash-equivalent before extraction.
Real-World Application
An appraiser finds a rented comparable house that sold for a cash-equivalent price and verifies its monthly rent with the buyer. Dividing price by monthly rent gives one of several GRMs used to support the subject's multiplier.
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