A rental property sells for $450,000 and generates monthly gross rent of $3,600. What is the gross rent multiplier (GRM)?
Correct Answer
A) 125
GRM is calculated as Sale Price ÷ Monthly Gross Rent. $450,000 ÷ $3,600 = 125.
Why This Is the Correct Answer
Option A (125) is correct because it follows the proper GRM formula: Sale Price ÷ Monthly Gross Rent = $450,000 ÷ $3,600 = 125. This means it would take 125 months of gross rental income to equal the purchase price. The calculation is performed using monthly rent, not annual rent, which is the standard practice for GRM calculations. This result indicates that the property would theoretically pay for itself through gross rental income in approximately 10.4 years (125 months ÷ 12 months).
Why the Other Options Are Wrong
Option B: 10.4
Option B (10.4) represents the number of years it would take to recover the investment (125 months ÷ 12 = 10.4 years), but this is not the GRM calculation. While this figure provides useful information about the investment timeline, the GRM specifically measures months, not years. This answer would result from incorrectly dividing the correct GRM by 12 or mistakenly using annual rent in the initial calculation.
Option C: 12.5
Option C (12.5) appears to result from using annual rent instead of monthly rent in the calculation ($450,000 ÷ $43,200 annual rent = 10.4, or possibly a decimal placement error). This is a common mistake where candidates multiply the monthly rent by 12 and then divide, or confuse GRM with other ratios. The GRM formula specifically requires monthly gross rent, not annual rent.
Option D: 104
Option D (104) likely results from a calculation error or misplacement of numbers during the division process. This could occur from rounding errors, transposing digits, or using incorrect figures in the calculation. Some candidates might arrive at this by incorrectly manipulating the numbers or confusing the GRM calculation with other real estate ratios.
GRM = Great Rental Months
Remember 'GRM = Great Rental Months' - it tells you how many MONTHS of rent equal the sale price. Think: 'Sale Price ÷ Monthly Rent = Months to pay back'
How to use: When you see a GRM question, immediately think 'months' and set up the division: Sale Price on top, Monthly Rent on bottom. The answer should be a number representing months (typically 100-200 for most properties).
Exam Tip
Always verify your GRM calculation makes sense - typical residential rental properties have GRMs between 100-200 months. If your answer is much lower or higher, double-check your math.
Common Mistakes to Avoid
- -Using annual rent instead of monthly rent in the calculation
- -Confusing GRM with capitalization rate or other investment ratios
- -Dividing monthly rent by sale price instead of sale price by monthly rent
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 serves as a quick screening tool for comparing investment properties by indicating how many months of gross rent it would take to equal the purchase price. GRM is widely used by appraisers, investors, and lenders to assess property values and investment potential. The calculation is straightforward: divide the sale price by the monthly gross rent, with the result representing the number of months needed to recover the purchase price through rental income alone.
Background Knowledge
GRM is calculated as Sale Price ÷ Monthly Gross Rent and represents the number of months of rental income needed to equal the purchase price. Lower GRM values generally indicate better investment opportunities, as the property generates more income relative to its cost. GRM is used for quick property comparisons but doesn't account for expenses, vacancy rates, or other investment factors.
Real-World Application
Appraisers use GRM to quickly compare similar rental properties in a market area. For example, if comparable properties have GRMs around 120-130, a property with a GRM of 125 would be competitively priced, while one with a GRM of 180 might be overpriced relative to its rental income potential.
More Math & Stats Questions
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