An income property sold for $1,500,000 and generates $125,000 in annual gross income. What is the gross income multiplier (GIM)?
Correct Answer
C) 12.0
Why this is correct: Gross Income Multiplier (GIM) = Sale Price ÷ Gross Annual Income. Calculation: $1,500,000 ÷ $125,000 = 12.0. Why the other choices are wrong: "0.083" is the inverse ($125,000 ÷ $1,500,000). "8.33" might be a misremembered GRM or miscalculation. "120.0" would result from using monthly income (if gross monthly were $12,500). Exam tip: GIM uses annual income; GRM uses monthly. Check the period: annual income given means compute GIM.
Why This Is the Correct Answer
Option B is correct because the GIM formula is Sale Price ÷ Gross Annual Income. Substituting the given values: $1,500,000 ÷ $125,000 = 12.0. This means it would take 12 years of gross income to equal the purchase price. The calculation is straightforward division with no additional adjustments needed.
Why the Other Options Are Wrong
Option A: 0.083
Option A (0.083) is the gross income ratio (income ÷ price), which is the reciprocal of GIM and represents the annual return percentage, not the multiplier.
Option B: 8.33
Option B (8.33) results from incorrectly dividing the gross income by the sale price ($125,000 ÷ $1,500,000), which is the inverse of the correct GIM formula.
Option D: 120.0
Option D (120.0) appears to result from a decimal placement error, possibly multiplying the correct answer by 10 or making an error in the division calculation.
GIM Price Over Income
Remember 'GIM = Big over Small' - the bigger number (Sale Price) goes over the smaller number (Annual Income). Think 'How many years of Gross Income to Match the price' = G.I.M.
How to use: When you see a GIM question, immediately identify the sale price (bigger number) and put it on top, then divide by the annual gross income (smaller number) on the bottom.
Exam Tip
Always double-check that you're using annual income, not monthly income, and ensure you're dividing price by income, not income by price - the result should typically be between 4-20 for most properties.
Common Mistakes to Avoid
- -Dividing income by price instead of price by income
- -Using monthly income instead of annual income
- -Confusing GIM with capitalization rate or gross rent multiplier
Concept Deep Dive
Analysis
The Gross Income Multiplier (GIM) is a fundamental real estate investment analysis tool that measures the relationship between a property's sale price and its gross annual income. It provides a quick way to compare income-producing properties and assess their relative value in the market. The GIM indicates how many years of gross income it would take to equal the purchase price, making it a useful screening tool for investors. A lower GIM generally suggests better value, while a higher GIM may indicate the property is overpriced relative to its income generation.
Background Knowledge
The Gross Income Multiplier is one of three primary income approach methods used in real estate appraisal, alongside capitalization rates and discounted cash flow analysis. It's particularly useful for quick property comparisons and initial investment screening, though it doesn't account for operating expenses or vacancy rates.
Real-World Application
Appraisers use GIM to quickly compare similar income properties in a market area. For example, if comparable apartment buildings have GIMs between 10-14, a property with a GIM of 12 would be considered reasonably priced, while one with a GIM of 20 might be overvalued.
More Income Approach Questions
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