A rental property sold for $480,000 and generates $4,000 in monthly rental income. What is the gross rent multiplier (GRM)?
Correct Answer
A) 10
GRM = Sale Price ÷ Monthly Rent. $480,000 ÷ $4,000 = 120 months, but GRM is typically expressed as the ratio using annual rent: $480,000 ÷ ($4,000 × 12) = 10.
Why This Is the Correct Answer
Option A is correct because GRM is typically calculated using annual rental income for standardization purposes. The calculation is $480,000 ÷ ($4,000 × 12 months) = $480,000 ÷ $48,000 = 10. This means it would take 10 years of gross rental income to equal the purchase price. A GRM of 10 is within the typical range for rental properties and allows for meaningful comparison with other investment opportunities.
Why the Other Options Are Wrong
Option B: 120
Option B represents the monthly GRM calculation ($480,000 ÷ $4,000 = 120), which while mathematically correct, is not the standard way GRM is expressed in real estate practice. Using monthly figures makes comparison difficult and is not the conventional industry standard.
Option C: 48
Option C appears to be the annual rental income ($4,000 × 12 = $48,000) rather than the GRM calculation. This shows confusion between the components of the formula rather than the actual ratio calculation.
Option D: 1.2
Option D (1.2) represents an inverted calculation or a completely incorrect approach to the GRM formula. This would suggest the annual rent is higher than the purchase price, which is mathematically impossible in this scenario.
GRM Annual Rule
Remember 'GRM Goes Annual' - GRM = Sale Price ÷ (Monthly Rent × 12). Think of it as 'how many YEARS of rent to buy the property.'
How to use: When you see a GRM question, immediately convert monthly rent to annual by multiplying by 12, then divide the sale price by that annual figure. Always think in terms of years, not months.
Exam Tip
Always check if the rental income given is monthly or annual - if monthly, multiply by 12 before calculating GRM. The answer should typically be between 8-15 for most residential rental properties.
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 or other investment ratios
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 and determining relative value in the marketplace. The GRM can be calculated using either monthly or annual rental income, but the annual method is more commonly used in professional practice. Understanding GRM calculation is essential for appraisers as it's frequently used in the income approach to valuation, particularly for residential rental properties.
Background Knowledge
GRM is one of several multipliers used in real estate analysis, alongside capitalization rates and cash-on-cash returns. The formula is always Sale Price ÷ Gross Rental Income, with annual income being the industry standard for consistency and comparison purposes.
Real-World Application
Appraisers use GRM to quickly assess whether a rental property is reasonably priced compared to similar properties in the area. For example, if comparable rentals have GRMs of 8-12, a property with a GRM of 15 might be overpriced, while one with a GRM of 6 might represent a good investment opportunity.
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
A building has a replacement cost of $800,000. Physical deterioration is estimated at $120,000, functional obsolescence at $60,000, and external obsolescence at $40,000. What is the depreciated value of the building?
Next Question
A property is purchased for $500,000 with a loan of $400,000. What is the loan-to-value ratio?