Nationwide Mortgage Licensing System (NMLS) Practice Exam

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Prepare for the Nationwide Mortgage Licensing System (NMLS) Exam. Utilize flashcards and multiple choice questions, each with hints and explanations. Ensure your success by getting thoroughly prepared!

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If the Gross Rent Multiplier (GRM) decreases, what happens to the property value?

Increases
Decreases
Does not change
Can increase or decrease

The correct answer is: Decreases

The Gross Rent Multiplier (GRM) is a valuation metric calculated by dividing the property's sale price by its annual rental income. It serves as a tool for investors to assess the potential profitability of rental properties based on expected income. When the GRM decreases, it indicates that either rental income has not changed while the property market value is adjusting downwards, or that similar properties are generating less rental income relative to their sale prices. As the GRM declines, it means that for the same level of rental income, potential buyers are willing to pay less for the property. This inversely affects property values; therefore, a decrease in the GRM suggests that the property value is decreasing. Consequently, the lower GRM reflects reduced demand or lower expectations about future rental income, leading to a lower valuation of the property. Understanding the relationship between GRM and property values is vital for investors, as it allows them to make informed decisions based on market dynamics.