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
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!
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
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:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
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 appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
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?
Next Question
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?