A multiplier was extracted as price divided by monthly gross rent. Why cannot it be applied directly to annual rent?
Correct Answer
B) The income period and definition must match the multiplier’s denominator.
Price divided by monthly rent produces a monthly-basis multiplier. Annual rent is twelve monthly payments under a fixed rent assumption, so applying the unconverted monthly multiplier to annual rent creates a twelvefold mismatch. Convert the basis explicitly before applying it.
Why This Is the Correct Answer
Option B is correct because the income period and income definition must match the multiplier's denominator. A price-to-monthly-rent multiplier applied to annual rent produces a twelvefold mismatch. The basis must be converted explicitly before the multiplier is used.
Why the Other Options Are Wrong
Option A: Annual rent includes a vacancy allowance, while monthly rent does not.
Option A is wrong because the problem is the period mismatch, not vacancy; nothing makes annual rent inherently include a vacancy allowance while monthly rent does not. Either period could be stated gross or after vacancy, and the definition must simply match the multiplier.
Option C: Monthly multipliers are legally restricted to residential property.
Option C is wrong because monthly multipliers are not legally restricted to residential property. The issue is mathematical consistency between the multiplier and the income it is applied to, not a legal limitation on property type.
Option D: Changing the income period changes the appraised property rights.
Option D is wrong because changing the income period does not change the property rights being appraised. The rights depend on the interest defined in the assignment, while the period only affects whether the multiplier is applied consistently.
Same basis in, same out
A multiplier carries the income basis it was built on, so monthly in means monthly out and annual in means annual out.
How to use: Use this check every time you apply GRM or GIM figures to a subject's rent.
Exam Tip
When a stem flags a monthly versus annual difference, the answer usually turns on matching the multiplier's denominator. Look for the option about consistency of period and definition.
Common Mistakes to Avoid
- -Applying a monthly multiplier to annual rent
- -Mixing gross rent with effective or net income when applying a multiplier
- -Assuming the period changes the property rights appraised
Concept Deep Dive
Analysis
This question tests the rule that a multiplier must be applied to the same level and period of income from which it was derived. A multiplier built from monthly gross rent is a monthly-basis multiplier. Applying it to annual rent mixes bases and overstates value by a factor of twelve.
Background Knowledge
Gross rent and gross income multipliers express the ratio of sale price to income. They are valid only when applied to the same kind of income, over the same period, from which they were derived. Monthly multipliers are typically much larger numbers than annual multipliers for the same property.
Real-World Application
An appraiser extracts a GRM of 150 from single-family rental sales using monthly rent. When estimating the subject's value, the appraiser applies 150 to the subject's monthly market rent, not its annual rent, to avoid a twelvefold overstatement.
More Income Approach Questions
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