Texas Real Estate State Practice Exam

Which approach is commonly used for income-producing properties using a GRM x rent calculation?

1. Market Data Approach

2. Income Approach

3. Cost Approach

4. Replacement Cost Approach

The correct answer is: Income Approach

The Income Approach is commonly used for evaluating income-producing properties, as it directly reflects the property's ability to generate revenue. This method is particularly useful for properties that are rented out, like apartment buildings or commercial real estate. The Gross Rent Multiplier (GRM) is a key part of this approach; it is calculated by dividing the property’s purchase price by its gross rental income. Consequently, to estimate the value of a property, you can multiply the monthly or annual rent by the GRM. This approach stands out because it focuses on the income potential, making it highly relevant for investors looking to understand the profitability of a property. In contrast, other appraisal methods like the Market Data Approach and Cost Approach focus on comparative sales and the cost to build or replace the property, which may not accurately represent its revenue-generating capabilities.