A commercial property generates gross income of $180,000 annually. If comparable properties typically sell for 8.5 times gross income, what is the indicated value?
Correct Answer
D) $1,530,000
Why this is correct: The Gross Income Multiplier (GIM) method estimates value by multiplying the subject's gross income by the market-derived multiplier. Calculation: Value = Gross Income * GIM = 180,000 * 8.5 = 1,530,000. Why the other choices are wrong: "$188,500" results from incorrectly adding 8.5% of the income. "$15,300,000" is off by a factor of 10 (180,000 * 85). "$21,176" results from dividing the income by 8.5, which is the inverse operation. Exam tip: For multiplier problems, identify if you multiply or divide. GIM and GRM are multipliers, so you multiply income by the factor.
Why This Is the Correct Answer
Option B correctly applies the GIM formula: Value = Gross Income × Gross Income Multiplier. The calculation is straightforward: $180,000 (annual gross income) × 8.5 (GIM from comparable sales) = $1,530,000. This represents the indicated market value of the commercial property based on its income-generating capacity relative to similar properties in the market. The GIM of 8.5 means that comparable properties typically sell for 8.5 times their annual gross income.
Why the Other Options Are Wrong
Option A: $188,500
This is simply the gross income plus the multiplier ($180,000 + 8.5 = $188,500), which incorrectly adds rather than multiplies the two values and produces an unrealistically low property value.
Option B: $15,300,000
This appears to result from multiplying by 85 instead of 8.5 ($180,000 × 85 = $15,300,000), representing a decimal point error that inflates the value by a factor of 10.
Option C: $21,176
This appears to be the result of dividing the gross income by the multiplier ($180,000 ÷ 8.5 = $21,176), which reverses the correct formula and would represent a fraction of annual income rather than property value.
GIM = Gross Income Magic
Remember 'GIM' as 'Gross Income Magic' - the magic formula is simply Value = Gross Income × Magic number (multiplier). Think of it as 'How many years of gross income does this property cost?'
How to use: When you see gross income and a multiplier, immediately think 'Gross Income Magic' and multiply them together. The multiplier tells you how many times the annual gross income the property is worth.
Exam Tip
Always double-check your decimal placement in GIM calculations - a common error is misplacing the decimal point in the multiplier, leading to values that are 10 times too high or too low.
Common Mistakes to Avoid
- -Dividing instead of multiplying (using income ÷ GIM)
- -Adding the multiplier to income instead of multiplying
- -Decimal point errors in the multiplier calculation
Concept Deep Dive
Analysis
This question tests the Gross Income Multiplier (GIM) method, which is a quick valuation technique commonly used in commercial real estate appraisal. The GIM method estimates property value by multiplying the gross annual income by a market-derived multiplier based on comparable sales. This approach is particularly useful for income-producing properties like apartments, office buildings, and retail centers where gross income data is readily available. The method assumes that properties with similar income characteristics should have similar value relationships to their gross income streams.
Background Knowledge
The Gross Income Multiplier is derived from analyzing comparable sales where the sale price is divided by the gross annual income to establish market patterns. GIM is different from capitalization rates as it uses gross income rather than net operating income and doesn't account for operating expenses or vacancy rates.
Real-World Application
Appraisers use GIM for quick market checks and preliminary valuations, especially when detailed operating expense data isn't available. It's particularly useful for apartment buildings where gross rent multipliers help establish value ranges before conducting more detailed income capitalization analysis.
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