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
D) 8.33
Why this is correct: The Gross Income Multiplier (GIM) is calculated by dividing the sale price by the annual gross income. Here, the calculation is: $2,000,000 (Sale Price) ÷ $240,000 (Annual Gross Income) = 8.333..., which rounds to 8.33. Why the other choices are wrong: The choice "12.0" results from incorrectly dividing income by price ($240,000 ÷ $2,000,000 = 0.12) and then perhaps misplacing the decimal. The choice "0.12" is the inverse of the correct multiplier (Income/Price). The choice "20.0" results from a different miscalculation, such as using monthly income incorrectly ($240,000/12 = $20,000 monthly; $2,000,000/$20,000 = 100, not 20). Exam tip: For GIM, remember: Multiplier = Price / Income. The result is a unitless number typically greater than 1. If you get a number less than 1, you've inverted the formula.
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 A: 12.0
Option A (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 B: 0.12
Option B (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 C: 20.0
Option C (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 Income Approach Questions
A building cost $2,500,000 to construct 8 years ago. Using straight-line depreciation over a 40-year life, what is the current depreciated value?
The following sale prices were recorded: $245,000, $250,000, $250,000, $255,000, $280,000. What is the mode?
A property has a replacement cost of $1,800,000. Physical deterioration is estimated at $200,000, functional obsolescence at $150,000, and external obsolescence at $100,000. What is the depreciated value using the breakdown method?
What is the present value of $150,000 to be received in 5 years, assuming a discount rate of 8%?
A triangular lot has a base of 100 feet and a height of 80 feet. What is the area in square feet?
An irregular lot can be divided into a rectangle (100' × 80') and a triangle (base 60', height 40'). What is the total area in acres?
A property has a net operating income of $85,000 and annual debt service of $68,000. What is the debt coverage ratio?
A warehouse has interior dimensions of 120 feet × 80 feet × 20 feet high. What is the volume in cubic feet?
A property is purchased for $500,000 with a loan of $400,000. What is the loan-to-value ratio?
A property sold for $400,000 with annual gross rent of $40,000. What is the gross rent multiplier?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Related Tools
Previous Question
A property generates annual cash flow of $24,000 to equity. The initial equity investment was $200,000. What is the equity dividend rate?
Next Question
A building cost $500,000 new and has depreciated $125,000. Using the extraction method, if the land is worth $150,000, what is the depreciated value of the improvements?