A property sold for $500,000 with a gross monthly income of $4,000. What is the gross rent multiplier (GRM)?
Correct Answer
B) 125
GRM is calculated as Sale Price ÷ Gross Monthly Rent: $500,000 ÷ $4,000 = 125.
Why This Is the Correct Answer
Option B (125) is correct because GRM is calculated by dividing the sale price by the gross monthly rent. Using the formula: $500,000 ÷ $4,000 = 125. This means it would take 125 months of gross rental income to equal the property's sale price. The calculation is direct and follows the standard GRM formula used throughout the real estate industry.
Why the Other Options Are Wrong
Option A: 10.4
Option A (10.4) appears to be calculating a different ratio, possibly confusing GRM with another metric like capitalization rate or attempting to annualize the calculation incorrectly.
Option C: 208
Option C (208) seems to be an incorrect calculation, possibly mixing up the numerator and denominator or applying an unrelated formula to the given data.
Option D: 250
Option D (250) is incorrect and appears to be a miscalculation, possibly doubling the correct answer or applying an incorrect mathematical operation to the given figures.
GRM = Great Rental Math
Remember 'GRM = Great Rental Math' where you 'Go Right to Money' by dividing Sale price by Monthly rent. Think of it as 'how many Months of rent = the sale Price' (M×P relationship).
How to use: When you see a GRM question, immediately identify the sale price (larger number) and monthly rent (smaller number), then think 'months to equal price' and divide the big number by the small number.
Exam Tip
Always double-check that you're using monthly rent, not annual rent, in GRM calculations - this is the most common source of errors on exam questions.
Common Mistakes to Avoid
- -Using annual rent instead of monthly rent in the calculation
- -Confusing GRM with cap rate and using net income instead of gross income
- -Reversing the formula by dividing monthly rent by sale price
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a fundamental valuation tool used in real estate appraisal to quickly estimate property values based on rental income. It represents how many months of gross rental income it would take to equal the property's sale price. GRM is particularly useful for comparing similar income-producing properties and provides a quick screening tool for investors. The calculation is straightforward: divide the sale price by the gross monthly rental income to determine the multiplier.
Background Knowledge
GRM is one of three primary income approach methods used in real estate valuation, alongside capitalization rates and discounted cash flow analysis. Understanding GRM requires knowing that it uses gross (not net) income and monthly (not annual) figures, making it distinct from other income multipliers.
Real-World Application
Appraisers use GRM to quickly screen comparable sales when valuing rental properties, helping determine if a property is priced appropriately relative to its income-generating potential and providing a baseline for more detailed income approach analyses.
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