What is the gross rent multiplier (GRM) for a property that sold for $480,000 with monthly rental income of $3,200?
Correct Answer
A) 150
GRM = Sale price ÷ Monthly rent = $480,000 ÷ $3,200 = 150.
Why This Is the Correct Answer
Option A (150) is correct because the GRM formula is Sale Price ÷ Monthly Rent. Calculating $480,000 ÷ $3,200 = 150. This means it would take 150 months (12.5 years) of rental income to equal the purchase price. The calculation is straightforward division with no additional conversions needed since we're using monthly rent for a monthly GRM.
Why the Other Options Are Wrong
Option B: 12.5
Option B (12.5) incorrectly divides monthly rent by annual rent or represents years instead of months. This might result from dividing 150 by 12 to convert to years, but GRM is expressed in months, not years.
Option C: 6.67
Option C (6.67) appears to be the result of dividing monthly rent by sale price ($3,200 ÷ $480,000), which reverses the correct formula. This would give a decimal less than 1, which doesn't make sense for GRM calculations.
Option D: 38,400
Option D (38,400) likely results from multiplying monthly rent by 12 to get annual rent ($3,200 × 12 = $38,400), but this is the annual rental income, not the GRM ratio.
Sale over Monthly = Months to Pay
Remember 'SoM = MtP' - Sale price over Monthly rent equals Months to Pay back. Think of it as 'How many months of rent would it take to pay for this property?'
How to use: When you see a GRM question, immediately identify the sale price (numerator) and monthly rent (denominator), then think 'SoM = MtP' to remember the correct formula direction.
Exam Tip
Always double-check that you're using monthly rent, not annual rent, and that you're dividing sale price BY rent, not rent BY sale price. The GRM should typically be between 100-200 for most residential properties.
Common Mistakes to Avoid
- -Using annual rent instead of monthly rent in the calculation
- -Reversing the formula by dividing rent by sale price
- -Confusing GRM with other ratios like cap rates or cash-on-cash returns
Concept Deep Dive
Analysis
The Gross Rent Multiplier (GRM) is a quick valuation tool used in real estate to estimate property value based on rental income. It represents how many months of rental income it would take to equal the property's sale price. GRM is calculated by dividing the sale price by the monthly rental income, providing a simple ratio for comparing similar properties. This metric is particularly useful for income-producing properties and helps investors quickly assess whether a property is reasonably priced relative to its rental income potential.
Background Knowledge
GRM is always calculated as Sale Price ÷ Monthly Rental Income, resulting in a number representing months. Lower GRM values generally indicate better investment opportunities, as the property generates more rent relative to its price. GRM should be compared among similar properties in the same market area for meaningful analysis.
Real-World Application
Appraisers use GRM to quickly screen comparable sales and rental properties. If most similar properties in an area have GRMs around 140-160, a property with a GRM of 200 might be overpriced, while one with a GRM of 120 might represent a good value or need further investigation.
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
An office building generates $180,000 in net operating income and has a capitalization rate of 8%. What is the indicated value?
Next Question
A subject property is 10% superior to a comparable sale in location. The comparable sold for $300,000. What adjustment should be made to the comparable?