An appraiser has a rent roll for a fourplex that indicates potential gross income of $70,000, but no expense data. A similar fourplex recently sold for $450,000. That sale had potential gross income of $62,500, effective gross income of $56,250 and NOI of $36,000. What is the indicated value of the subject?
Correct Answer
A) $504,000
A multiplier must be applied to the same level of income from which it was derived. The subject's known figure is PGI, so the multiplier is $450,000 ÷ $62,500 = 7.2, and 7.2 × $70,000 = $504,000. The EGI multiple of 8.0 gives $560,000, which is mismatched to PGI, and averaging the PGI and EGI multiples gives $532,000. Taking the sale's $20,250 of expenses from $70,000 and applying the NOI multiple of 12.5 gives $621,875, which borrows expenses the subject has not shown and skips vacancy.
Why This Is the Correct Answer
Option A is correct because the subject's income is known at the PGI level, so the matching multiplier is $450,000 ÷ $62,500 = 7.2. Applying it gives 7.2 × $70,000 = $504,000.
Why the Other Options Are Wrong
Option B: $532,000
Option B, $532,000, averages the PGI and EGI multiples to 7.6 and multiplies by $70,000. Blending levels does not produce a match. The correct calculation is 7.2 × $70,000 = $504,000.
Option C: $560,000
Option C, $560,000, is the EGI multiple of $450,000 ÷ $56,250 = 8.0 times $70,000. That multiple belongs with income after vacancy and collection loss, and $70,000 is before that loss. The correct calculation is 7.2 × $70,000 = $504,000.
Option D: $621,875
Option D, $621,875, borrows the sale's dollar expenses of $56,250 − $36,000 = $20,250, skips vacancy and applies the NOI multiple of 12.5: ($70,000 − $20,250) × 12.5 = $621,875. The sale's dollar expenses do not establish the subject's, and the subject's known income is at the PGI level. The correct calculation is 7.2 × $70,000 = $504,000.
Same level in, same level out
A multiplier works at the income level that built it. PGI multipliers go with PGI, EGI with EGI, and NOI with NOI.
How to use: Use this when a comparable's data list several income levels.
Exam Tip
Find the subject's income level first and then pick the comparable's matching figure. Set the other levels aside even though they are listed.
Common Mistakes to Avoid
- -Applying an EGI multiple to income before vacancy loss
- -Averaging multiples from different income levels
- -Borrowing a comparable's dollar expenses to build the subject's NOI when no expense data exist
Concept Deep Dive
Analysis
More data are available than needed, so the skill is choosing the right figures. Three multiples can be extracted from one sale, but each is valid for one level of income. The subject's income level determines the multiple.
Background Knowledge
Income can be stated at the potential gross, effective gross or net level. The same price gives a smaller multiple at higher income levels. Multipliers and rates are therefore meaningful at the level where they were derived, and that level needs to match in the comparison.
Real-World Application
An appraiser reviewing a fourplex sale has its full operating statement, but the subject's owner has provided a rent roll and no expenses. The appraiser uses a potential gross multiplier from the sale, since the rent roll gives a PGI estimate for the subject.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
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Previous Question
The subject property is a rental house with no garage. A nearly identical house with a garage rents for $2,500 per month and recently sold for $630,000 in a cash transaction. Paired rentals show that a garage adds $150 to monthly rent. What is the subject’s indicated value using the gross rent multiplier from this sale?
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Annual PGI is $480,000 and combined vacancy and collection loss is 8% of PGI. No other income applies. What EGI results?