An appraiser is comparing two recent sales of similar fourplexes, each with level rent throughout the year. One data service reports Sale 1 at 11.2 times annual gross rent, and another reports Sale 2 at 129 times monthly gross rent. Which sale has the higher multiplier?
Correct Answer
C) Sale 1, at 134.4 times monthly rent
With level rent, annual rent is twelve times monthly rent, so 11.2 times annual rent equals 11.2 × 12 = 134.4 times monthly rent. That exceeds Sale 2's 129, so Sale 1 has the higher multiplier. Restating Sale 2 as 129 ÷ 12 = 10.75 is valid, but 10.75 is below 11.2. Picking Sale 2 at 129 compares a monthly figure with an annual one, and no dollar rents are needed because the conversion factor is twelve.
Why This Is the Correct Answer
Option C is correct because price ÷ annual rent equals price ÷ (12 × monthly rent), so a monthly multiple is twelve times the annual multiple when rent is level. Sale 1's 11.2 becomes 11.2 × 12 = 134.4 on a monthly basis. Since 134.4 exceeds 129, Sale 1 sold at the higher multiple.
Why the Other Options Are Wrong
Option A: Sale 2, at 10.75 times annual rent
Option A has the conversion right, since 129 ÷ 12 = 10.75, but picks the wrong sale. On the annual basis Sale 2's 10.75 is below Sale 1's 11.2, so Sale 2 has the lower multiplier.
Option B: Sale 2, at 129 times monthly rent
Option B compares 129 with 11.2 without converting. The 129 is a monthly multiple and the 11.2 an annual one; on the monthly basis Sale 1 is 11.2 × 12 = 134.4, which exceeds 129.
Option D: Cannot be determined without the rents
Option D says the rents are needed, but with level rent, annual rent is twelve times monthly rent whatever the dollar amount. That allows 11.2 × 12 = 134.4 to be compared directly with 129.
Monthly Multiples Look Bigger
The smaller the income period, the bigger the multiple. Going from annual to monthly, multiply by 12; going from monthly to annual, divide by 12.
How to use: Use this check to confirm that a converted multiplier moved in the right direction before you compare it.
Exam Tip
Convert both figures to one basis before comparing them. A monthly multiple in the hundreds and an annual multiple near ten can describe very similar pricing.
Common Mistakes to Avoid
- -Comparing an annual multiple directly with a monthly multiple
- -Dividing by 12 when converting an annual multiple to a monthly one
- -Believing dollar rents are needed to convert a multiple under level rent
Concept Deep Dive
Analysis
A multiplier means nothing until its income period is known. An annual multiple is the smaller number because annual rent is the larger denominator. Before comparing sales, convert one multiple to the other's basis and then compare like with like.
Background Knowledge
Gross multipliers may be stated on annual or monthly income, and residential practice often uses monthly rent. A multiplier should be applied to the same level of income from which it was derived, which includes the same period.
Real-World Application
An appraiser pulls one sale from a data service that reports annual multiples and another from a broker who quotes monthly multiples. Before placing them in the same grid, the appraiser restates both on the monthly basis used for the subject's rent.
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The subject property is a triplex. The owner's report shows income of $42,600 for the year just ended: cash receipts of $66,000 less operating expenses of $23,400, including property taxes. The receipts include $2,700 of refundable security deposits collected from new tenants and $1,500 of next January's rent paid early in December. No deposits were refunded during the year, and all of the year's rent was collected in that year. The other figures are typical of the market. The market overall rate is 7.5%, and the owner's mortgage carries an 8.4% interest rate. By how much would capitalizing the reported income overstate the indicated value?