What is a key difference between the Gross Rent Multiplier method and the Cap Rate method?

The Gross Rent Multiplier (GRM) method is primarily concerned with the relationship between the gross rental income of a property and its purchase price. A key feature of this method is that it does not take into account the operating expenses associated with the property. Instead, it uses only the gross rent to calculate the GRM, making it a simpler, quicker approach to estimate property value, especially for residential investment properties. This simplicity is useful for preliminary evaluations but does mean that it overlooks critical factors that affect the net profitability of an investment.

In contrast, the Capitalization Rate (Cap Rate) method evaluates a property based on its Net Operating Income (NOI) and considers the expenses incurred in operating the property. This involves analyzing the income left after all operating expenses have been deducted from gross income, allowing for a more comprehensive assessment of the property's financial performance.

Therefore, the correct answer highlights the essential difference that while GRM provides a quick estimate based solely on gross rents, it does so without factoring in operating expenses, which is a significant limitation.