An appraiser is valuing a rental property with gross monthly rent of $8,400. Using a gross rent multiplier (GRM) of 142, what is the indicated value?
Correct Answer
B) $1,192,800
Why this is correct: Value using a Gross Rent Multiplier (GRM) is calculated as: Monthly Gross Rent × GRM. Here, $8,400 × 142 = $1,192,800. Why the other choices are wrong: $119,280 results from incorrectly multiplying by 14.2 or misplacing the decimal. $99,400 is not supported by the given numbers. $1,428,000 results from incorrectly using a GRM of 170 or miscalculating. Exam tip: GRM is always: Monthly Rent × GRM = Value. Double-check your decimal placement.
Why This Is the Correct Answer
Option A ($1,192,800) is correct because it properly applies the GRM formula: Property Value = Monthly Gross Rent × GRM. The calculation is straightforward: $8,400 × 142 = $1,192,800. This multiplication gives the indicated market value based on the gross rent multiplier method. The GRM method assumes that properties with similar gross rental income ratios will have comparable values in the market.
Why the Other Options Are Wrong
Option A: $119,280
Option A ($119,280) seems to result from multiplying the monthly rent by approximately 14.2 instead of 142, likely a decimal placement error or misreading the GRM factor.
Option C: $99,400
Option C ($99,400) appears to result from dividing the monthly rent by a factor rather than multiplying, possibly confusing GRM with a capitalization rate calculation or making an arithmetic error.
Option D: $1,428,000
Option D ($1,428,000) appears to result from incorrect multiplication, possibly reversing the digits in the GRM (using 170 instead of 142) or making a computational error in the multiplication process.
GRM = Gross Rent Magic
Remember 'GRM Magic': Gross Rent × Multiplier = Market value. Think of the multiplier as a 'magic number' that transforms monthly rent into property value.
How to use: When you see a GRM question, immediately identify the monthly gross rent and the GRM factor, then simply multiply them together - no division, no complex calculations, just straight multiplication for the 'magic' result.
Exam Tip
Always double-check that you're using monthly rent (not annual) with GRM, and ensure you multiply rather than divide - GRM questions are designed to test basic multiplication skills and formula application.
Common Mistakes to Avoid
- -Dividing instead of multiplying the rent by the GRM
- -Using annual rent instead of monthly rent in the calculation
- -Confusing GRM with capitalization rates or other income multipliers
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation method used in the income approach to estimate property value based on gross rental income. It represents the relationship between a property's sale price and its gross monthly rental income, providing a simple multiplication factor. The GRM is derived from comparable sales data where similar properties' sale prices are divided by their monthly gross rents. This method is particularly useful for quick estimates and preliminary valuations, though it's less precise than detailed income capitalization methods since it doesn't account for operating expenses, vacancy rates, or other income factors.
Background Knowledge
The Gross Rent Multiplier is calculated by dividing the sale price of comparable properties by their monthly gross rent to establish a market-derived multiplier. This multiplier is then applied to the subject property's monthly gross rent to estimate value, making it a useful tool for quick valuations in the income approach.
Real-World Application
Appraisers use GRM for quick property valuations when analyzing rental properties, especially for preliminary estimates, mass appraisal work, or when detailed income and expense data isn't readily available, though it should be supplemented with more detailed income approach methods for final valuations.
More Income Approach Questions
A property generates $85,000 in Net Operating Income and sells for $1,062,500. What is the overall capitalization rate?
A property has potential gross income of $180,000, vacancy and collection loss of $15,000, and operating expenses of $65,000. What is the Net Operating Income?
A comparable sale occurred 8 months ago for $425,000. Market conditions indicate property values have increased 0.5% per month since that time. What is the adjusted sale price?
A property generates $150,000 in potential gross income. Market data indicates a 7% vacancy rate and operating expenses of 35% of effective gross income. If the cap rate is 9.5%, what is the indicated value?
A property sold for $320,000 one year ago. If market conditions have improved by 6% since that sale, what is the time-adjusted sale price for comparison purposes?
A commercial building cost $2,500,000 to construct. The land value is $600,000. If the building has suffered 15% physical deterioration and 8% functional obsolescence, what is the depreciated cost of the improvements?
A building's gross rent multiplier (GRM) is 120. If the monthly rent is $2,500, what is the indicated value?
In the cost approach, economic obsolescence is characterized as:
The concept of regression in property values means that:
A commercial property has potential gross income of $120,000, vacancy and collection loss of 8%, and operating expenses of $35,000. Using a cap rate of 9.5%, what is the indicated value?
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