Which statement is true about GRM and cap rate?

Which statement is true about GRM and cap rate?

• A. GRM uses net operating income; cap rate uses gross rent.
• B. GRM is price divided by gross rent; cap rate is NOI divided by property value.
• C. Both GRM and cap rate provide exact property value without adjustment.
• D. Neither GRM nor cap rate considers operating expenses.

Answer: (B)

GRM and cap rate are two ways to gauge how much a rental property is worth based on income, but they use different income figures. GRM is a simple measure that compares price to the annual gross rent the property can bring in, so you divide the price by the yearly gross rent. Cap rate, by contrast, looks at profitability after operating expenses—it's the net operating income (NOI) divided by the property's value. So the statement that GRM equals price divided by gross rent and cap rate equals NOI divided by property value matches the standard formulas. GRM is a rough screening tool because it ignores operating expenses, while cap rate incorporates those expenses through NOI, giving a more realistic sense of how much income the property actually generates. The other statements misstate what each metric uses or imply they give exact property values, which they do not.

GRM and cap rate are two ways to gauge how much a rental property is worth based on income, but they use different income figures. GRM is a simple measure that compares price to the annual gross rent the property can bring in, so you divide the price by the yearly gross rent. Cap rate, by contrast, looks at profitability after operating expenses—it's the net operating income (NOI) divided by the property's value. So the statement that GRM equals price divided by gross rent and cap rate equals NOI divided by property value matches the standard formulas.

GRM is a rough screening tool because it ignores operating expenses, while cap rate incorporates those expenses through NOI, giving a more realistic sense of how much income the property actually generates. The other statements misstate what each metric uses or imply they give exact property values, which they do not.