A cash-equivalent price is $480,000 and monthly gross rent is $2,000. What is the monthly-basis multiplier? The matching annual multiplier would use twelve equal monthly rents.
Correct Answer
B) 240
480000÷2000=240; annual rent=2000×12=24000; annual multiplier=480000÷24000=20. Common errors: computing the annual-basis multiplier instead of the monthly one gives 20; multiplying the monthly multiplier by 12 gives 2880; misplacing the decimal (dividing by 200) gives 2400.
Why This Is the Correct Answer
Option B is correct because the monthly-basis multiplier is the cash-equivalent price divided by the monthly gross rent: $480,000 ÷ $2,000 = 240. A multiplier must be applied to the same level of income from which it was derived, so a monthly multiplier pairs with monthly rent. The annual multiplier of 20 is a different figure on a different basis.
Why the Other Options Are Wrong
Option A: 20
Option A, 20, is the annual-basis multiplier: $480,000 ÷ ($2,000 × 12) = $480,000 ÷ $24,000 = 20. The question asks for the monthly-basis multiplier, which is $480,000 ÷ $2,000 = 240.
Option C: 2400
Option C, 2400, results from misplacing the decimal and dividing by 200 instead of 2,000: $480,000 ÷ 200 = 2,400. The correct monthly multiplier is $480,000 ÷ $2,000 = 240.
Option D: 2880
Option D, 2880, comes from multiplying the monthly multiplier by 12: ($480,000 ÷ $2,000) × 12 = 2,880. Converting to an annual basis divides the multiplier by 12 (giving 20), and the monthly multiplier itself is 240.
Monthly multiplier is twelve times bigger
Because monthly rent is one-twelfth of annual rent, the monthly multiplier is twelve times the annual one: 20 × 12 = 240.
How to use: Use this to sanity-check whether your multiplier is on a monthly or annual basis.
Exam Tip
Read whether the question wants a monthly or annual multiplier before dividing, since both figures often appear among the choices.
Common Mistakes to Avoid
- -Reporting the annual multiplier when the monthly one is asked for
- -Multiplying the monthly multiplier by 12 instead of recognizing the annual one is smaller
- -Dropping a zero from the rent during division
Concept Deep Dive
Analysis
This question tests whether you can compute a gross rent multiplier on the correct income basis. A monthly multiplier divides price by monthly rent, while an annual multiplier divides price by annual rent. Here $480,000 divided by $2,000 equals 240, and the annual equivalent would be $480,000 divided by $24,000, or 20.
Background Knowledge
A gross rent multiplier is the ratio of sale price to gross rent and is commonly used for small residential income properties. It can be expressed on a monthly or annual basis, and the residential appraisal form applies it to estimated monthly market rent. Consistency between how the multiplier is derived and how it is applied is essential.
Real-World Application
An appraiser extracts multipliers from rented single-family sales in a subdivision by dividing each cash-equivalent price by its monthly rent. She then applies the reconciled monthly multiplier to the subject's estimated monthly market rent on the residential form. Mixing an annual multiplier into that step would understate value dramatically.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
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Previous Question
The subject property is a fourplex with market rent of $2,500 per unit per month. One unit was empty all of last year, and the owner's statement shows rent collected of $90,000, property taxes and insurance of $18,000, utilities and maintenance of $9,000 that vary in direct proportion to occupancy, and mortgage payments of $36,000. The stabilized vacancy/credit loss allowance for similar properties is 5% of PGI. What is the projected stabilized net operating income?
Next Question
While verifying a fourplex sale, an appraiser learns that the buyer paid $900,000 cash equivalent. Potential gross income over the prior year was $100,000, but an above-market lease on one unit was ending, and the buyer projected potential gross income of $90,000 less a 5% vacancy allowance. The subject fourplex has market potential gross income of $110,000. What value does a potential gross income multiplier from this sale indicate?