California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
A commercial property has a scheduled gross income of $120,000 per year. Vacancy and collection losses are estimated at 5% of the scheduled gross income. Total operating expenses are $40,000 per year. What is the property's Gross Rent Multiplier (GRM) if it recently sold for $800,000?
- A7.33
- B5.6
- C6.67
- D7.02
Show answer & explanationAnswer & explanation
Correct answer: D. 7.02
The Gross Rent Multiplier (GRM) is calculated by dividing the sales price by the Effective Gross Income (EGI). First, calculate vacancy: $120,000 * 0.05 = $6,000. Then, calculate EGI: $120,000 - $6,000 = $114,000. Finally, GRM = Sales Price / EGI = $800,000 / $114,000 = 7.0175, rounded to 7.02.
Why the other options are wrong
- A. Incorrect, likely a miscalculation.
- B. Incorrect, likely from using NOI or a different income figure.
- C. Incorrect, this would be if PGI was used ($800,000 / $120,000).
Gross Rent Multiplier (GRM)
A rough measure of the value of an income-producing property, calculated by dividing the property's sales price by its effective gross income (or gross annual income for residential).
- Used for properties with consistent income streams
- Lower GRM indicates a potentially better investment
- Does not account for operating expenses or vacancies directly (if using PGI), but should use EGI for accuracy
Memory trick: Price Over Gross Income is GRM