A monthly gross-rent multiplier is explicitly defined as price divided by monthly gross rent. What does a multiplier of 120 mean?
Correct Answer
A) The indicated price is 120 times the matching monthly gross rent.
The multiplier is a price-to-gross-rent ratio on the stated monthly basis. It is not an investment return percentage, a unit count or an appreciation rate. An annual-basis multiplier would have a different denominator, so GRM is not universally monthly unless specified.
Why This Is the Correct Answer
Option A is correct because a monthly GRM is price divided by monthly gross rent, so a GRM of 120 means the indicated price is 120 times the matching monthly gross rent. It is a ratio, not a return percentage, unit count or growth rate. An annual-basis GRM would use a different denominator and be a different number.
Why the Other Options Are Wrong
Option B: The property earns a 120% annual investment return on its price.
Option B is wrong because a GRM is a price-to-rent factor, not a rate of return. A 120% annual return on price is unrelated to the ratio of price to monthly gross rent.
Option C: The property has 120 rental units.
Option C is wrong because the GRM says nothing about how many rental units a property has. The 120 is a ratio of price to monthly gross rent.
Option D: The property must appreciate by 120% per year.
Option D is wrong because a GRM is not an appreciation requirement. The 120 relates price to current monthly gross rent and implies nothing about value growing 120% per year.
GRM is price per rent
Read a GRM of 120 as 120 months of gross rent equals the price.
How to use: Use this reading to interpret any GRM quickly and reject answers that turn it into a percentage.
Exam Tip
A multiplier is a factor, not a percentage. Answers that treat it as a return, a growth rate or a count are distractors.
Common Mistakes to Avoid
- -Reading a GRM as a percentage return
- -Assuming a GRM is monthly when the basis is not stated
- -Applying a monthly GRM to annual rent
Concept Deep Dive
Analysis
This question tests what a gross rent multiplier actually measures. A GRM is a ratio of price to gross rent, here defined on a monthly basis. A multiplier of 120 means price is 120 times the matching monthly gross rent.
Background Knowledge
A gross rent multiplier expresses the relationship between sale price and gross rent as a factor. Monthly GRMs are common for single-family and small residential properties, while annual gross income multipliers are common for larger income properties. The basis must be stated and applied consistently.
Real-World Application
An appraiser finds rental houses selling at about 120 times monthly rent. For a subject house with a supported market rent of $2,000 per month, the GRM indicates about $240,000 by the income approach.
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