An appraiser derives a multiplier from comparables using annual rents, then applies it to the subject's monthly rent. The result is:
Correct Answer
A) Wrong by roughly a factor of twelve
Why this is correct: Multipliers are unit-specific. An annual-rent multiplier (e.g., 10) applied to a monthly rent (e.g., $1,000) gives $10,000, but the correct annual value is $1,000 × 12 × 10 = $120,000. The result is wrong by a factor of 12. Why the other choices are wrong: 'Slightly conservative but usable' underestimates the massive error. 'Correct if the leases are month-to-month' is false; the basis mismatch remains. 'Correct after adding back vacancy' is irrelevant; the error is in the multiplier basis, not vacancy. Exam tip: Always match the multiplier's basis (monthly vs. annual) to the subject's rent basis. Double-check your units!
Why This Is the Correct Answer
Applying an annual-basis multiplier to a monthly rent understates value by roughly a factor of twelve, since the multiplier was calibrated against income twelve times larger than the figure it is being applied to. The error is mechanical and complete; nothing about the property or the market softens it. The remedy is equally mechanical: convert the subject's rent to an annual figure, or rederive the multiplier on a monthly basis. Consistency between derivation and application is the entire discipline of multiplier analysis.
Why the Other Options Are Wrong
Option B: Slightly conservative but usable
Describing a twelvefold understatement as slightly conservative badly misjudges the scale, and a value indication at roughly eight percent of its correct level is not usable for any purpose. Conservatism in appraisal means erring modestly within a supportable range, not producing a figure off by an order of magnitude. The option tests whether the candidate has grasped how large the error is.
Option C: Correct if the leases are month-to-month
Lease term has no bearing on the arithmetic. A month-to-month tenancy might justify a different multiplier because of added risk, but it does not change the requirement that the multiplier and the rent share a time basis. The option offers a plausible-sounding property fact to distract from a units problem.
Option D: Correct after adding back vacancy
Vacancy affects whether the multiplier should be built on potential or effective gross income, which is a separate consistency question, but adding vacancy back cannot repair a factor-of-twelve mismatch. The two issues live in different parts of the calculation. Adjusting for the wrong variable leaves the real error untouched.
Match the Clock
Every multiplier carries a hidden time unit. Derived monthly, applied monthly. Derived annually, applied annually. Write the unit beside the number the moment you compute it and the mismatch becomes impossible.
How to use: Before applying any multiplier, state its basis out loud and compare it to the subject's rent basis. If they differ, convert one before multiplying rather than adjusting afterward.
Exam Tip
Sanity-check the result against the property. A single-family house indicated at $20,000 or a small apartment building at $30 million both signal a units error rather than a market finding.
Common Mistakes to Avoid
- -Mixing monthly and annual bases between derivation and application
- -Deriving a multiplier from potential gross income and applying it to effective gross income
- -Using a multiplier across properties with materially different expense ratios
Concept Deep Dive
Analysis
A rent multiplier is a ratio of sale price to rent, and the ratio is only meaningful when the rent in the numerator's denominator and the rent it is later applied to are measured on the same basis. Two multipliers are in common use and they differ by a factor of twelve. The gross rent multiplier used in residential work is typically derived from monthly rent, so a house selling for $240,000 with $2,000 monthly rent shows a GRM of 120. The gross income multiplier used in commercial work is typically derived from annual gross income, so the same property would show a multiplier of 10. Deriving a multiplier of 10 from annual rents and then applying it to a monthly rent of $2,000 produces $20,000 rather than $240,000, an error of an entire order of magnitude. The mistake is a units error rather than a valuation judgment, and it is caught instantly by asking whether the answer is plausible for the property.
Background Knowledge
You need the definitions of gross rent multiplier and gross income multiplier and the conventional bases each uses, plus the rule that a multiplier must be applied to income measured the same way it was derived. You should also know that multipliers must be consistent as to potential versus effective gross income and that they capture no expense differences between properties.
Real-World Application
An appraiser deriving multipliers from four rental house sales records each one as a monthly-basis GRM in the range of 115 to 125, labels the column accordingly, converts the subject's stated annual rent to a monthly figure before applying the selected multiplier, and notes the basis in the report.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
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A building's rent roll totals $120,000 at full occupancy. Vacancy and collection loss is 5% and laundry income adds $4,800. What is effective gross income?
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A 50-unit apartment complex is subject to a 99-year ground lease with annual land rent fixed at $75,000, payable in perpetuity. The improvements were constructed by the leaseholder and will revert to the landowner at lease expiration. The appraiser is developing a market value opinion of the leasehold interest. Which statement BEST describes the appropriate income approach treatment?