Investment Analysis

Question 1

James Jordan purchases single-family residences to use as residential rental properties. He currently owns 4 properties in the same approximate geographic area, and is considering the purchase of another single-family residence situated nearby. In order to avoid the cost of an appraisal, Jordan uses the Gross Rent Multiplier (GRM) to help him make an appropriate offer. Jordan knows that the monthly GRM for his 4 current properties is 200. In order to maintain a GRM of 200 for a property with a current monthly rent of $2,500, how much should Jordan’s offer be?

Answer 1

$500,000

• In order to maintain a Gross Rent Multiplier of 200, Jordan’s offer for this additional property should be $500,000. The Gross Rent Multiplier (aka the “Gross Income Multiplier”) is a simpler, less accurate alternative to capitalization takes into account the income generated by a parcel of real estate, but not the expenses charged to the property. This alternative to capitalization is most widely used with single-family residences. There are the three mathematical relationships related to the Gross Rent Multiplier you should know for your exam:
• Gross Rent Multiplier X Rent = Value (e.g., 200 GRM X $2,500 rent = $500,000 Value)
• Value ÷ Rent = Gross Rent Multiplier (e.g., $500,000 Value ÷ $2,500 Rent = 200 GRM)
• Value ÷ Gross Rent Multiplier = Rent (e.g., $500,000 Value ÷ 200 GRM = $2,500 Rent)

Question 2

Investing can best be defined as _____________.

Answer 2

giving up present spending in exchange for future benefits.

• Investing in real estate is the act of giving up money that could be spent elsewhere in exchange for the potential for profit in the future. The likelihood of a profit is called the risk. As a rule, the greater the risk, the lower the investment. Investment in vacant land is a low-risk investment because vacant land does not tend to depreciate as much or as fast as improved land; and the cost to purchase vacant land is usually lower than the cost to purchase improved land.