A property's gross rent multiplier (GRM) is 120. If the monthly rent is $2,400, what is the indicated value?
Correct Answer
C) $288,000
Why this is correct: The GRM formula is Value = Monthly Rent * GRM. Given a monthly rent of $2,400 and a GRM of 120, the calculation is: $2,400 * 120 = $288,000. Why the other choices are wrong: $240,000 results from multiplying by 100 (a common GRM) or misplacing a decimal. $20,000 is the result of dividing the rent by the GRM ($2,400 / 120). $3,456,000 results from mistakenly using annual rent ($2,400 * 12 = $28,800) and then multiplying by 120. Exam tip: GRM is applied to monthly rent. Value = Monthly Rent * GRM.
Why This Is the Correct Answer
Option B is correct because the GRM formula for finding value is straightforward: Property Value = Monthly Rent × GRM. Substituting the given values: $2,400 × 120 = $288,000. This calculation directly applies the fundamental GRM relationship where the multiplier represents how many times the monthly rent equals the property's market value. The math is simple multiplication with no additional conversions needed since both the rent and GRM are already in monthly terms.
Why the Other Options Are Wrong
Option A: $240,000
$240,000 appears to result from dividing the correct answer by 1.2 or making a decimal error, possibly confusing the GRM value or making an arithmetic mistake in the multiplication process.
Option B: $20,000
$20,000 appears to result from incorrectly dividing the monthly rent by the GRM ($2,400 ÷ 120), which reverses the proper formula and would actually calculate a monthly rent if given a value and GRM.
Option D: $3,456,000
$3,456,000 seems to result from multiplying the annual rent by the GRM ($2,400 × 12 × 120), incorrectly converting to annual figures when GRM specifically uses monthly rent as the standard calculation base.
GRM = Gross Rent Magic
Remember 'GRM Magic': Gross Rent × Multiplier = Market value. Think of the GRM as a 'magic number' that transforms monthly rent into property value through simple multiplication.
How to use: When you see a GRM problem, immediately identify if you're solving for Value (Rent × GRM), GRM (Value ÷ Rent), or Rent (Value ÷ GRM). The 'magic' always involves these three components in multiplication or division relationships.
Exam Tip
Always double-check that you're using monthly rent, not annual rent, in GRM calculations. The exam often includes annual figures as distractors, so confirm your time periods match before calculating.
Common Mistakes to Avoid
- -Using annual rent instead of monthly rent in the calculation
- -Dividing instead of multiplying when finding property value
- -Confusing GRM with other multipliers like capitalization rates or price-to-earnings ratios
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation tool used in real estate to estimate property value based on rental income. It represents the relationship between a property's market value and its gross monthly rental income. The GRM is calculated by dividing the sale price by the monthly gross rent, and conversely, property value can be estimated by multiplying the monthly rent by the GRM. This method is particularly useful for income-producing properties and provides a rapid comparison tool for similar properties in the same market.
Background Knowledge
GRM is always based on monthly gross rental income, not annual figures, and provides a quick market comparison tool rather than a detailed valuation method. The multiplier varies by property type and market conditions, with residential properties typically having GRMs between 100-200 in most markets.
Real-World Application
Appraisers use GRM for quick property valuations and market analysis, particularly when comparing similar rental properties. Real estate investors rely on GRM to rapidly screen potential acquisitions and determine if a property's asking price aligns with its income potential relative to comparable properties.
More Income Approach Questions
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