Multiple Choice
How might fiscally responsible individuals use investments in securities to meet their financial goals?
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7. Receivables and Investments
Introduction to Investments in Securities
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When appraisers use the Gross Rent Multiplier (GRM), what are they primarily estimating?
A
The capitalization rate for a commercial property
B
The depreciation expense of a property over its useful life
C
The net operating income after deducting all expenses
D
The value of an income-producing property based on its gross rental income
Verified step by step guidance1
Understand the concept of Gross Rent Multiplier (GRM): GRM is a valuation method used by appraisers to estimate the value of an income-producing property based on its gross rental income. It is a simple ratio that compares the property's price to its annual gross rental income.
Recognize the formula for GRM: The formula is \( \text{GRM} = \frac{\text{Property Price}}{\text{Annual Gross Rental Income}} \). This formula helps appraisers determine the relationship between the property's price and its rental income.
Identify the purpose of GRM: GRM is primarily used to estimate the value of a property. It does not directly calculate the capitalization rate, depreciation expense, or net operating income. Instead, it focuses on the gross rental income as the basis for valuation.
Apply GRM in practice: To use GRM, appraisers typically compare the GRM of similar properties in the market to determine a reasonable multiplier. Then, they multiply the annual gross rental income of the subject property by the GRM to estimate its value.
Clarify the correct answer: Based on the explanation, the correct answer is that appraisers use GRM to estimate 'The value of an income-producing property based on its gross rental income.'
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