A rental property generates $72,000 in annual rent and sold for $900,000. What is the gross rent multiplier (GRM)?
Correct Answer
B) 12.5
GRM is calculated by dividing the sale price by the annual gross rent: $900,000 ÷ $72,000 = 12.5.
Why This Is the Correct Answer
Option B (12.5) is correct because GRM is calculated by dividing the sale price by the annual gross rent. Using the formula: GRM = Sale Price ÷ Annual Gross Rent = $900,000 ÷ $72,000 = 12.5. This means it would take 12.5 years of gross rental income to equal the purchase price. The calculation is straightforward division with no additional adjustments needed.
Why the Other Options Are Wrong
Option A: 8.0
Option A (8.0) is incorrect because it represents the result of dividing the annual rent by some other figure, not the proper GRM calculation of sale price divided by annual rent.
Option C: 125
Option C (125) is incorrect because it appears to be the result of multiplying the correct answer by 10, possibly from a decimal placement error or confusion with percentage calculations.
Option D: 0.08
Option D (0.08) is incorrect because it represents the reciprocal of the correct answer (1 ÷ 12.5 = 0.08), which would be the capitalization rate if we were calculating annual return as a percentage.
GRAPES Method
GRAPES: Gross Rent And Price Equal Sales-to-rent ratio. Remember 'Sale Price over Gross Rent' - think of grapes hanging DOWN from the vine (Sale price on top, rent on bottom).
How to use: When you see a GRM question, visualize grapes hanging down and remember the formula flows the same way: Sale Price (top) ÷ Annual Gross Rent (bottom) = GRM.
Exam Tip
Always double-check that you're using annual rent, not monthly rent, in GRM calculations. If given monthly rent, multiply by 12 first.
Common Mistakes to Avoid
- -Using monthly rent instead of annual rent in the calculation
- -Inverting the formula (dividing rent by sale price)
- -Confusing GRM with capitalization rate calculations
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a fundamental real estate investment metric that measures the relationship between a property's purchase price and its gross rental income. It provides a quick way to compare investment properties and assess their relative value based on income generation potential. The GRM tells investors how many years of gross rent it would take to equal the purchase price, making it a useful screening tool for rental property investments. Understanding GRM calculation is essential for appraisers as it's commonly used in the income approach to valuation, particularly for smaller residential rental properties.
Background Knowledge
GRM is calculated as Sale Price ÷ Annual Gross Rent and represents how many years of gross rent equal the purchase price. It's used primarily for quick comparisons between similar rental properties and as a rough screening tool for investment analysis.
Real-World Application
Appraisers use GRM to quickly assess if a rental property's asking price is reasonable compared to similar properties in the area. For example, if most 4-unit buildings in an area have GRMs of 10-12, a property with a GRM of 15 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
Related Tools
Previous Question
Using the band of investment method, if the mortgage component is 75% at 6% and the equity component is 25% at 12%, what is the overall capitalization rate?
Next Question
Using the band of investment method, calculate the overall capitalization rate given: mortgage rate 6.5%, loan-to-value ratio 75%, and equity yield rate 12%.