When using a market-derived gross rent multiplier (GRM) based on monthly rent, what should an appraiser apply it to?
Correct Answer
D) The subject’s comparable monthly gross rent
A multiplier extracted from cash-equivalent price divided by monthly gross rent must be applied to comparable monthly gross rent. Match utilities, concessions and other income conventions. Operating differences still need analysis; the matching denominator does not prove complete comparability.
Why This Is the Correct Answer
Option D is correct because a multiplier derived from monthly gross rent must be applied to the subject's comparable monthly gross rent. Income multipliers compare properties through the ratio of sale price to gross income or rent, so the subject's income must be measured the same way. Utilities, concessions and other income conventions should match those of the comparables.
Why the Other Options Are Wrong
Option A: The subject’s annual gross rent
Option A, the subject's annual gross rent, is wrong because the multiplier was derived from monthly rent. Applying a monthly GRM to annual rent mixes periods and overstates value about twelvefold.
Option B: The comparables’ average monthly gross rent
Option B, the comparables' average monthly gross rent, is wrong because the multiplier is applied to the subject's own rent. Multiplying the comparables' rent indicates what a typical comparable is worth, not what the subject is worth.
Option C: The subject’s monthly net operating income
Option C, the subject's monthly net operating income, is wrong because a gross rent multiplier is built from gross rent, not net operating income. Applying it to NOI mismatches the income level and would understate value.
Gross with gross, monthly with monthly
A monthly gross rent multiplier multiplies monthly gross rent, nothing else.
How to use: Use this to reject answers that apply a GRM to net income or a different period.
Exam Tip
Choose the answer that applies the multiplier to the same income measure and period used to derive it.
Common Mistakes to Avoid
- -Applying a gross rent multiplier to net operating income
- -Applying a monthly multiplier to annual rent
- -Applying the multiplier to the comparables' rent instead of the subject's
Concept Deep Dive
Analysis
This question tests consistency in applying a gross rent multiplier. A GRM extracted from cash-equivalent prices divided by monthly gross rent must be applied to the subject's comparable monthly gross rent. The income it multiplies must match the derivation in level (gross, not net), period (monthly, not annual) and property (the subject, not the comparables).
Background Knowledge
The gross rent multiplier is a simple income technique used mainly for single-family and small residential rentals. It assumes the comparables and subject have similar expense ratios and income conventions, because the multiplier does not account for expenses directly. Matching the income basis is necessary, but it does not prove the properties are fully comparable.
Real-World Application
An appraiser derives a monthly GRM from three rented houses whose tenants pay their own utilities. The subject's owner pays water and trash, so she checks whether the subject's monthly rent is on a comparable basis before applying the multiplier. She notes the difference rather than assuming the matching rent basis settles comparability.
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