What distinguishes gross rent multiplier from capitalization rate?

The gross rent multiplier (GRM) and capitalization rate (cap rate) are both important metrics in real estate appraisal, but they serve different purposes, and option B accurately captures this distinction.

Gross rent multiplier is primarily a quick assessment tool that estimates a property's value based on its rental income. It is calculated by dividing the property's sale price by its gross rental income. This method provides an upfront way to understand what the property might be worth relative to its rental capability, without taking other factors into account.

In contrast, the capitalization rate is a more nuanced metric that relates net operating income (NOI) to the property's value. The cap rate is calculated by dividing the NOI (which deducts operating expenses from gross income) by the property's current market value. This means that the cap rate takes into account the expenses necessary to maintain the property, providing a clearer picture of its financial performance.

This distinction is significant because while both metrics are used for investment decisions, they reflect different aspects of property evaluation. The GRM gives a quick overview of rental income potential, while the cap rate provides deeper insight into the property’s financial viability after expenses.

The other options do not accurately represent the differences between the two concepts. For instance, options that suggest exclusivity