How is Gross Rent Multiplier (GRM) calculated?

Gross Rent Multiplier (GRM) is a straightforward metric used primarily in real estate investment analysis to assess the value of a rental property based on the income it generates. The correct method for calculating GRM is to take the market value of the property and divide it by the gross rent the property can earn annually. This ratio provides investors with a quick way to gauge whether a property might be a sound investment based on its income potential.

The formula is as follows:

GRM = Market Value / Gross Annual Rent

This calculation allows investors to compare different properties on a relative scale and to estimate their potential investment returns based on income generation. A lower GRM often indicates a potentially better investment, as it suggests a higher return on investment through rental income.

The other options presented do not represent the methodology for calculating GRM. For instance, using annual operating expenses or total square footage would not yield relevant information related to rental income and property value. Total liabilities divided by equity pertains more to financial leverage ratios rather than real estate income analysis. Therefore, the choice relating to dividing market value by rent accurately reflects the GRM calculation.