Massachusetts Real Estate License Practice Test

What is the relationship between rental price and the Gross Monthly Rent Multiplier?

1. It is used to predict future rental trends

2. It inversely affects the property value

3. It directly indicates property market value

4. It has no relationship in real estate valuation

The correct answer is: It directly indicates property market value

The chosen answer highlights that the Gross Monthly Rent Multiplier (GRM) directly indicates property market value. This relationship exists because the GRM is a calculation used by real estate investors to assess the value of income-producing properties. The GRM is calculated by dividing the property's sale price by its gross monthly rental income. As a result, a higher GRM typically suggests a higher value for the property based on its rental income potential. Investors often use this metric as a quick way to evaluate investment properties, comparing the GRM to other properties in a similar market to determine if a property is appropriately priced. In essence, the GRM provides a simple and effective method for gauging the expected return on investment based on current rental prices, thus directly linking rental price to the property market value. The other options do not accurately reflect the relationship between rental price and GRM. For example, while predicting future rental trends can be useful, it does not describe the mathematical or direct relationship that exists with property value. Additionally, the GRM does not inversely affect property value; rather, it provides a straightforward ratio that, when applied, can help identify property value based on rental income. Lastly, stating that there is no relationship in real estate valuation misrep