Income Approacheasy8.2% of exam

Applying a GRM of 164 to a subject renting at $2,650 monthly indicates a value of:

Correct Answer

A) $434,600

Why this is correct: The Gross Rent Multiplier (GRM) is calculated as Value = Monthly Rent × GRM. Here, $2,650 × 164 = $434,600. The GRM is a quick valuation tool but ignores expenses, so comparables must be similar. Why the other choices are wrong: "$16,150, dividing instead of multiplying" incorrectly divides rent by the GRM. "$5,215,200, using annual rent with a monthly multiplier" mistakenly uses annual rent ($31,800) × 164. "$404,600, applying a rounded multiplier of 160" uses an incorrect, rounded GRM. Exam tip: GRM multiplies monthly rent by the multiplier; ensure rent and multiplier are on the same time basis (monthly).

Answer Options

$434,600

$16,150, dividing instead of multiplying

$5,215,200, using annual rent with a monthly multiplier

$404,600, applying a rounded multiplier of 160

Why This Is the Correct Answer

Multiplying $2,650 of monthly rent by a multiplier of 164 gives $434,600. Both figures are on the same monthly basis, which is what makes the multiplication valid. The magnitude of the multiplier itself confirms the basis, since a figure in the hundreds could only be monthly. Dividing the result back by the rent recovers 164, which is the quickest verification.

Why the Other Options Are Wrong

Option B: $16,150, dividing instead of multiplying

$16,150 comes from dividing $2,650 by 164 rather than multiplying, inverting the relationship. A multiplier is applied by multiplication by definition, and dividing produces a figure with no interpretation. The implausibility of a $16,150 house value is a one-second check.

Option C: $5,215,200, using annual rent with a monthly multiplier

$5,215,200 multiplies the annual rent of $31,800 by the monthly-basis multiplier of 164, mixing time bases and inflating the result twelvefold. This is the classic units error in multiplier work and it produces an answer off by an order of magnitude. Confirming that both figures are monthly before multiplying prevents it.

Option D: $404,600, applying a rounded multiplier of 160

$404,600 applies a rounded multiplier of 160 instead of the 164 the stem supplies, which is a rounding error at the input stage rather than the conclusion. Rounding belongs at the end of an analysis, applied to the final figure, never to a factor being carried through a calculation. The $30,000 difference shows why.

Check the Magnitude for the Basis

A multiplier in the hundreds is monthly; one in the single or low double digits is annual. Read the magnitude, confirm the rent matches that basis, then multiply once.

How to use: Write both figures with their time basis labeled before computing. Then verify by dividing your value by the rent to see whether you recover the stated multiplier.

Exam Tip

Never round a multiplier before applying it. Rounding inputs is one of the most reliably penalized habits on computational items.

Common Mistakes to Avoid

-Mixing annual rent with a monthly multiplier
-Dividing by the multiplier instead of multiplying
-Rounding the multiplier before applying it to the subject's rent

Concept Deep Dive

Analysis

The gross rent multiplier converts rent directly into value by multiplication, so value equals rent times the multiplier. The entire discipline of the technique is unit consistency: a multiplier derived from monthly rents must be applied to monthly rent, and one derived from annual income must be applied to annual income. A GRM of 164 is unmistakably a monthly-basis figure, since annual-basis multipliers for residential property run in the low double digits, so it pairs with the subject's $2,650 monthly rent to give $434,600. The distractors are each built from a specific error the technique invites: dividing instead of multiplying, mixing an annual rent with a monthly multiplier, and rounding the multiplier before applying it. Beyond the arithmetic, the appraiser should remember what a GRM cannot see. It ignores expenses entirely, so it is only valid among properties with similar expense ratios, and it ignores vacancy, lease terms, and condition. It is a screening and corroborating tool rather than a substitute for a properly developed income approach on a property of any complexity.

Background Knowledge

You need the gross rent multiplier relationship in both directions, value equals rent times GRM and GRM equals price divided by rent, and the convention that residential GRMs are typically monthly while commercial gross income multipliers are annual. You should also know the technique's limitations, particularly that it ignores expenses, vacancy, and lease terms.

Real-World Application

An appraiser deriving GRMs from five rental house sales records each as a monthly-basis figure in the 158 to 170 range, selects 164 for the subject based on its condition and location relative to the set, applies it to verified monthly market rent, and treats the indication as support alongside her sales grid.

gross rent multipliermonthly rent basisunit consistencyincome indication

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