A property has a gross income multiplier of 8.5 and generates annual gross income of $96,000. What is the indicated value?
Correct Answer
B) $816,000
Why this is correct: The Gross Income Multiplier (GIM) relates value to gross annual income. The formula is Value = Annual Gross Income * GIM. Calculation: $96,000 * 8.5 = $816,000. Why the other choices are wrong: '$87,500' might result from misapplying a GRM to monthly income. '$104,500' is close to $96,000 + 8.5%. '$11,294' results from dividing $96,000 by 8.5. Exam tip: For GIM, multiply income by the multiplier. For GRM (Gross Rent Multiplier), multiply monthly rent by the multiplier.
Why This Is the Correct Answer
Option A is correct because it properly applies the GIM formula: Property Value = Annual Gross Income × Gross Income Multiplier. Multiplying $96,000 (annual gross income) by 8.5 (GIM) equals $816,000. This straightforward calculation demonstrates the direct relationship between gross income and property value when using the income approach. The GIM method assumes that properties with similar income characteristics should have similar value relationships.
Why the Other Options Are Wrong
Option A: $87,500
Option A ($87,500) seems to result from subtracting a portion of the GIM from the annual gross income ($96,000 - $8,500), which is not a recognized appraisal calculation and doesn't follow any income approach methodology.
Option C: $104,500
Option C ($104,500) appears to result from adding the GIM to the annual gross income ($96,000 + $8,500), which has no basis in appraisal methodology and doesn't represent any meaningful valuation calculation.
Option D: $11,294
Option D ($11,294) results from incorrectly dividing the annual gross income by the GIM ($96,000 ÷ 8.5), which reverses the proper formula and would represent approximately 1.4 months of gross income rather than a property value.
GIM = Gross Income Magic
Remember 'GIM Magic': Gross Income × Multiplier = Market value. Think of the multiplier as a 'magic number' that transforms annual income into total property value, like multiplying your monthly salary by 12 to get annual income, but in reverse.
How to use: When you see a GIM problem, immediately identify the two key numbers: the annual gross income and the multiplier. Always multiply these together (never divide) to get the property value. If you get a very small number, you probably divided instead of multiplied.
Exam Tip
Double-check your calculation by asking if the answer makes sense - a property generating $96,000 annually should be worth several times that amount, not less than the annual income.
Common Mistakes to Avoid
- -Dividing income by GIM instead of multiplying
- -Using monthly income instead of annual income
- -Confusing GIM with capitalization rate calculations
Concept Deep Dive
Analysis
This question tests the fundamental income approach concept of Gross Income Multiplier (GIM), which is a quick valuation method used to estimate property value based on gross rental income. The GIM represents how many years of gross income it would take to equal the property's market value. It's calculated by dividing comparable sales prices by their annual gross incomes, then applying the resulting multiplier to the subject property's gross income. This method is particularly useful for income-producing properties like rental apartments, office buildings, and retail spaces.
Background Knowledge
The Gross Income Multiplier is derived from market data by analyzing the relationship between sale prices and gross incomes of comparable properties. It's a simplified version of more complex income capitalization methods and assumes that the subject property has similar operating expense ratios and risk characteristics as the comparables used to derive the multiplier.
Real-World Application
Appraisers use GIM for quick property valuations, especially when analyzing apartment buildings or commercial properties. For example, if similar apartment buildings in an area sell for 8-9 times their gross annual rent, an appraiser can quickly estimate that a building collecting $100,000 in annual rent should be worth approximately $800,000-$900,000.
More Income Approach Questions
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