A property sold for $450,000 and generates monthly rental income of $3,750. What is the gross rent multiplier (GRM)?
Correct Answer
A) 10.0
GRM is calculated as Sale Price ÷ Monthly Rent. $450,000 ÷ $3,750 = 120. However, this is incorrect - the correct calculation is $450,000 ÷ ($3,750 × 12) = $450,000 ÷ $45,000 = 10.0.
Why This Is the Correct Answer
Option A (10.0) is correct because GRM requires annual rental income in the denominator. First, convert monthly rent to annual: $3,750 × 12 = $45,000. Then divide the sale price by annual rent: $450,000 ÷ $45,000 = 10.0. This means it would take 10 years of gross rental income to equal the purchase price. The explanation provided with the question contains an error in its initial calculation but arrives at the correct final answer.
Why the Other Options Are Wrong
Option B: 120.0
Option B (120.0) represents the incorrect calculation of dividing sale price by monthly rent ($450,000 ÷ $3,750 = 120), which would give a monthly rent multiplier, not the standard GRM that uses annual income.
Option C: 12.0
Option C (12.0) might result from confusion about the time period conversion, possibly thinking there are 10 months in a year or making an arithmetic error in the annual income calculation.
Option D: 45.0
Option D (45.0) represents the annual rental income in thousands ($45,000 ÷ $1,000 = 45), which is not the GRM calculation but rather just the annual rent amount expressed differently.
GRM = Years to Pay
Remember 'GRM shows YEARS to pay' - since GRM uses ANNUAL income, it tells you how many YEARS of rent equal the price. Think: 'Gross Rent Multiplier = Get Rent Yearly'
How to use: When you see GRM questions, immediately convert monthly rent to annual by multiplying by 12, then divide sale price by that annual amount. The answer will be a reasonable number of years (typically 4-15 for most properties).
Exam Tip
Always check if the rental income given is monthly or annual - if monthly, multiply by 12 first. Your final GRM answer should be a reasonable number of years, typically between 4-15 for most rental properties.
Common Mistakes to Avoid
- -Using monthly rent instead of annual rent in the calculation
- -Confusing GRM with cap rate or other investment ratios
- -Forgetting to multiply monthly rent by 12 to get annual income
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation tool used in real estate to compare properties based on their relationship between sale price and rental income. It represents how many years of gross rental income it would take to equal the purchase price of a property. The GRM is calculated by dividing the sale price by the annual gross rental income, not monthly income. This metric helps investors quickly assess whether a rental property is reasonably priced compared to similar properties in the market.
Background Knowledge
GRM is always calculated using annual gross rental income, not monthly income, and represents the number of years of rental income needed to equal the purchase price. It's a comparative tool used alongside other valuation methods like cap rates and cash-on-cash returns in income property analysis.
Real-World Application
Appraisers use GRM to quickly screen comparable rental properties and identify outliers in the market. For example, if most similar properties have GRMs around 10-12, a property with a GRM of 6 might be undervalued or have hidden issues, while one with a GRM of 18 might be overpriced.
More Math & Stats Questions
What is the area of a triangular lot with a base of 120 feet and a height of 80 feet?
An irregular lot has the following measurements: Side A = 100', Side B = 150', Side C = 120', Side D = 180'. If the lot can be divided into two rectangles (100' × 150' and 120' × 30'), what is the total area?
A property has a potential gross income of $180,000, vacancy and collection loss of 7%, and operating expenses of $65,000. What is the NOI?
A property generates $120,000 in net operating income and is valued at $1,500,000. What is the capitalization rate?
A building has potential gross income of $180,000, vacancy and collection loss of 8%, and operating expenses of $54,000. What is the net operating income?
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
USPAP (Ethics & Standards)
15% of exam
Report Writing & Compliance
10% of exam