A commercial property has annual gross income of $240,000 and sold for $2,000,000. What is the gross income multiplier (GIM)?
Correct Answer
A) 8.33
GIM = Sale Price ÷ Annual Gross Income. $2,000,000 ÷ $240,000 = 8.33.
Why This Is the Correct Answer
Option A (8.33) is correct because it follows the proper GIM formula: Sale Price ÷ Annual Gross Income. Calculating $2,000,000 ÷ $240,000 equals 8.33, which means the property sold for 8.33 times its annual gross income. This ratio indicates that it would take approximately 8.33 years of gross income to equal the purchase price. The calculation is straightforward division with no additional adjustments or conversions needed.
Why the Other Options Are Wrong
Option B: 12.0
Option B (12.0) is incorrect because it represents an inverted or miscalculated ratio that doesn't follow the GIM formula. This number might result from incorrectly dividing income by price or making an arithmetic error in the division process.
Option C: 0.12
Option C (0.12) is incorrect because it represents the gross income ratio (income ÷ price) rather than the gross income multiplier (price ÷ income). This is the reciprocal of what we're looking for and would be expressed as a decimal percentage rather than a multiplier.
Option D: 20.0
Option D (20.0) is incorrect and represents a significant calculation error, possibly from misplacing decimal points or using wrong figures in the division. This number is far too high for the given values and doesn't result from any logical manipulation of the provided data.
GPS Navigation Method
Remember 'GPS' - Gross income multiplier = Price ÷ Sales (gross income). Just like GPS guides you to your destination, this formula guides you to the right GIM calculation.
How to use: When you see a GIM question, think 'GPS' and remember that Price comes first in the division (Price ÷ Gross income), just like you need to know your destination (Price) before GPS can calculate your route using current location (Gross income).
Exam Tip
Always double-check that you're dividing sale price BY income, not income by sale price - the GIM should typically be a number greater than 1, usually between 4-15 for most commercial properties.
Common Mistakes to Avoid
- -Dividing income by price instead of price by income
- -Using net income instead of gross income
- -Forgetting to convert monthly income to annual income before calculating
Concept Deep Dive
Analysis
The Gross Income Multiplier (GIM) is a fundamental valuation metric used in commercial real estate appraisal to quickly assess property values relative to their income-generating capacity. It represents how many years of gross annual income it would take to equal the property's sale price, serving as a comparative tool between similar properties. The GIM is calculated by dividing the sale price by the annual gross income, providing a simple ratio that helps appraisers and investors evaluate whether a property is reasonably priced. This metric is particularly useful in the income approach to valuation and for initial property screening, though it should be used alongside other valuation methods for comprehensive analysis.
Background Knowledge
The Gross Income Multiplier is one of three key multipliers used in real estate valuation, alongside the Net Income Multiplier and Rent Multiplier. Understanding that GIM uses gross income (before expenses) rather than net income is crucial, as it provides a quick comparison tool but doesn't account for operating expenses or property management efficiency.
Real-World Application
Appraisers use GIM to quickly screen comparable sales and identify properties that may be overpriced or underpriced relative to their income. For example, if similar properties in an area have GIMs around 8-10, a property with a GIM of 15 might be overpriced or have lower income potential.
More Math & Stats Questions
What is the area of a triangular lot with a base of 120 feet and a height of 80 feet?
An irregular lot has the following measurements: Side A = 100', Side B = 150', Side C = 120', Side D = 180'. If the lot can be divided into two rectangles (100' × 150' and 120' × 30'), what is the total area?
A property has a potential gross income of $180,000, vacancy and collection loss of 7%, and operating expenses of $65,000. What is the NOI?
A property generates $120,000 in net operating income and is valued at $1,500,000. What is the capitalization rate?
A building has potential gross income of $180,000, vacancy and collection loss of 8%, and operating expenses of $54,000. What is the net operating income?
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